People's Bank of China: Making more room for yuan to weaken - ING

"Even though the People's Bank of China did not change the 7D policy rate, the Shanghai interbank offered rates (Shibor) has fallen quickly, from 4.1550% at the end of June to 3.1740% in July and now 2.8940% in August," ING analysts note.

Key quotes

"We believe this is a result of the window guidance from the central bank to cushion the economy from the damaging effects of the escalating trade war."

"The central bank has shut down capital outflow channels via the Shanghai Free Trade Zone and has penalised cases that violated cross-border fund regulations. It has also managed to support the yuan by imposing a 20% charge on short yuan positions in forward contracts, and it restarted the counter-cyclical factor for the daily fixing in August."

"We don't believe this implies that the central bank would like the yuan to appreciate against the dollar even if the dollar strengthens against most currencies. Instead, we see the counter-cyclical factor as a tool to control the speed of yuan depreciation, not a tool to change yuan direction. As capital outflow channels have been almost closed, this gives more room for yuan depreciation as the worry of massive capital outflows is minimised. We retain our end-year forecast of USDCNY 7.0."