PBoC likely to allow Chinese yuan’s market-driven appreciation, says Scotiabank

The People’s Bank of China (PBoC) is expected to allow the yuan’s market-driven appreciation and to step in to prevent the yuan from weakening versus a basket if the dollar strengthens across the board, according to the latest research report from Scotiabank.

The US and China signed the phase-one trade deal in Washington on Wednesday, bringing the first chapter of a protracted trade war between the world’s two largest economies to a close. The two nations said they will agree upon the timing of further negotiations.

According to the eight-part deal that includes enforcement mechanisms, China will open its markets to more American companies, increase farm and energy imports and provide greater protection for American technology and trade secrets.

As a condition of Beijing signing the deal, the US agreed to halve tariffs on USD120 billion in Chinese goods to 7.5 percent and to forgo other planned tariffs, although it will maintain 25 percent tariffs on USD250 billion of Chinese products, the report added.

More tariff reductions will be left to later negotiations including Chinese subsidies to domestic companies and Beijing's oversight of Chinese state-owned firms. China has committed to purchasing an additional USD200 billion worth of American goods and services by 2021, which could further shrink its trade surplus with the US in the year of 2020 and 2021.

China’s customs data on Tuesday showed that the country’s trade surplus with the US dropped 8.5 percent y/y to USD295.8 billion last year from a record USD323.3 billion in 2018.

A currency pact included in the agreement reaffirms the two nations’ G-20 commitments to forgo competitive devaluations including through large-scale, persistent, one-sided intervention in exchange markets.

According to Chapter 5 in the agreement, if there is failure to arrive at a mutually satisfactory resolution on issues related to exchange rate policy or transparency under the Bilateral Evaluation and Dispute Resolution Arrangement, the US Treasury Secretary or the PBoC Governor may also request that the IMF a) undertake rigorous surveillance of the macroeconomic and exchange rate policies and data transparency and reporting policies of the requested Party; or b) initiate formal consultations and provide input, as appropriate.

However, there is no agreement to publish intervention data, which disappointed the market. Earlier on Monday, the US Treasury Department dropped its designation of China as a "currency manipulator" ahead of the phase-one trade deal due to be signed Wednesday.

Meanwhile, US Treasury Secretary Steven Mnuchin said in a statement that "China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability."