PBOC policy measures diappoints overseas traders

The PBoC set benchmark deposit rates for five different maturities: demand, 3-month, 6-month, 1-year, 2-year and 3-year. The ceiling to corresponding rates offered by banks to depositors was lifted from 1 time to 1.1 times of these benchmark rates in June 2012 - and then to 1.2 times in November 2014 and 1.3 times in March 2015.

Following the latest change to the ceiling, a majority of commercial banks no longer set their deposit rates at the ceiling.

The central bank also proclaimed that it will begin implementing a deposit insurance scheme (DIS) on 1 May 2015. The DIS serves as a safety net for small depositors and is considered as one of the necessary conditions for completing deposit rate liberalization. Since the upper limit has become less of a constraint now and the safety net is soon to be put in place, the timing for the PBoC to remove the ceiling on deposit rates is approaching.

Implication and impact on exchange rates: 

Since Chinese exchange rate is being administered by government authority that is the People's Bank of China (PBoC) who controls the intrinsic value of the renminbi. They fix the USD/CNY exchange rate on each trading day. This is the rate that applies to trade flows into and out of China only. Investors may start having tepid view on this policy measure by central bank. On the other disheartening part is reducing export volumes may hamper Chinese exchange rates in near future.

Derivatives Strategy: FX swap 

Therefore, potential downside risk of CNY can be mitigated though cross currency swaps against HKD which seems to be hard over Yuan. Sell CNY for forward delivery and buy that currency for another forward delivery longer tenor.