CNY countercyclical factor is re-activated

CFETS (a sub-institution of the PBOC) said in a statement that since August most banks in the CNY fixing panel have adjusted the countercyclical factor to mitigate the pro-cyclical CNY sentiment. This is the first time that CFETS emphasized the role of the countercyclical factor after the factor’s reported “suspension” in January (although it was never completely eliminated, on our estimates). In our view, the CFETS statement suggests that i) the authorities will be more proactive in signaling their CNY guidance to the market; and ii) they would like the market to pay more attention to such guidance, and might take more concrete actions to burnish the guidance as needed.

The countercyclical factor was first introduced in May 2017, although its formulation has never been officially specified . It was being built up as a device for the authorities to credibly communicate their CNY guidance to the market. Especially in the first several months since its introduction, the authorities seemed to often follow up with major FX operations should the countercyclical factor have gone unheeded by the market. In our view, the credibility of the countercyclical factor has been gradually reinforced, as many market participants now put more weight to the information embedded in the factor when forming their near-term CNY expectation.

In January, the countercyclical factor was  suspended. While the factor seemed to have become more muted on average, our estimates suggest that it had not been entirely suspended. There were still a couple of notable occasions when it was set to significantly lean against the market pressure, such as during early February against a bout of appreciation .

In recent days, the countercyclical factor has shown a greater bias on the strong side, in line with today’s CFETS statement, and the CNY against the basket has been maintained at a broadly stable level. We believe CFETS’s explicit acknowledgement of the countercyclical factor’s re-activation suggests that one, the authorities will likely be more proactive in signaling their CNY guidance, relative to the last few months; and the last , if the guidance were not heeded by the market, there might be follow-up policy actions to imprint the guidance on the market .