- The strong US dollar has taken its toll on the renminbi in recent months, although it has been flat in trade-weighted terms. In a strong-dollar world, we expect the People’s Bank of China to continue to allow some depreciation, but resist significant CNY weakening. We now forecast the CNY/USD to reach almost 7 by end-2016, and hover around that level throughout 2017.
- The CNY depreciation is mostly driven by the surge in the US dollar as markets bet on wider fiscal deficits, stronger economic growth and higher interest rates in the US under Donald Trump’s presidency. But in fact, the CNY has weakened less than other currencies have, leaving China’s trade-weighted exchange rate broadly constant.
Since early October, the CNY has continued its slide against the USD, touching 6.92 last week – the weakest since 2008
- Since 2015, the PBoC’s policy has been to allow some depreciation in the face of pressures but to intervene to manage the pace, reducing foreign exchange reserves in the process. Going forward, capital account factors point to further CNY/USD depreciation. But real-economy considerations will lead the PBoC to continue to dampen those pressures.
- Meanwhile, the strong US dollar will complicate Trump’s aim to shrink US trade deficits, further weakening the case for a major CNY/USD depreciation, in our view.
- To contain FX pressures in such a setting, Chinese policymakers will not shy away from further tight capital-account restrictions, if needed. They could also take lower profile steps such as slowing down outbound investment by state-owned enterprises and overseas lending by banks.
Losing out against the US dollar
Since early October, the CNY has continued its slide against the US$, touching 6.92 last week – the weakest since 2008. The steady weakening against the greenback (and thus also against the Hong Kong dollar) stimulates further financial capital outflows from China and raises fears about further depreciation.
The CNY depreciation reflects the strengthening of the US$ on global FX markets, driven by investor expectations that the US Federal Reserve will raise interest rates as early as next month.
The dollar soared by another 4.4% in effective terms since Donald Trump was elected US President amid hefty increases in US bond yields. Markets are betting on wider fiscal deficits, stronger growth and higher inflation in the US (the latter in part because of more protectionism).
It is worth pointing out that the CNY has actually depreciated less against the dollar than other major currencies (see chart below). As a result, China’s trade-weighted, effective exchange rate has remained broadly constant in this period.
Exchange rates vs. the US dollar
% change since October 1
Sources: Haver Analytics, Oxford Economics
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