China To Stick To Policy For CNY Gains

Forex News China policy focus remains on CNY gains, says UBS. Notes financial and economic affairs committee of NPC yesterday concluded plenary session with reaffirmation of tight monetary and fiscal policies, and identified inflation as top policy priority in 2H08; committee heard representations from government agencies including Ministry of Commerce which recently submitted application to consider slowing pace of CNY gains. House says, though, this plea "was not given much emphasis.
Recall that the Ministry was also against the de-pegging of the yuan in 2005." Overall industrial profit margins have broadened since 2005 on back of reforms and productivity gains, now stand around 20%. While at micro level some small exporters of low-end products are feeling squeeze, "we do not think this is enough to sway policy makers away from the threat of inflation, especially given the domestic fuel price hikes. If left unguarded, the second round effect of the hike in fuel prices could significantly boost inflation prints." Doesn't expect CNY to gain at slower than 6% annualised for much of 2H until inflation eases back to sub-6%; end-year USD/CNY target is 6.60.