A premier on NATIXIS estimate of PBOC countercyclical factor

The degree of intervention in the CNY market has been discussed for years. What is clear is that the RMB is not yet a flexible currency notwithstanding the measures taken to increase market influence in the CNY determination. One of the key measures is the countercyclical factor which is supposed to guide the PBoC on the market view of the CNY, so as to reduce “excessive” volatility while still let the market determine the direction towards which the CNY should move. This note reviews the functioning of the PBoC’s countercyclical factor to conclude that the countercyclical factor has become a very useful tool for the PBoC not only to reduce exchange rate volatility but even to change the direction of the RMB from appreciation to depreciation (as earlier this year) or from depreciation to appreciation as was the case in the last few days. In other words, the countercyclical factor offers PBoC the space for the constructive ambiguity needed to run the RMB as a heavily managed float. More specifically, according to our estimate of the countercyclical factor, four phases can be identified from June in 2017 when it was introduced. The different phases point to the PBoC heavy hand on the exchange rate determination to the point of not only leaning against the wind but literally bending the RMB exchange rate in the opposite direction. In the specific case of the rapid CNY depreciation in July and early August this year, it seems clear that the countercyclical factor has been instrumental to fend off market driven forces toward depreciation all the way to a rebound of the RMB.