Market Views: How low could the renminbi go?

China’s currency has taken a hit this year, at times depreciating at its fastest rate since the China Foreign Exchange Trade System (Cfets) was created in the mid-1990s.

General US dollar strength, growing trade tensions, and slowing domestic economic growth have all combined to drag down the value of the renminbi against the greenback by about 9% since April.

Based on the traded-weighted Cfets renminbi index, that weakness has diffused since June against a range of other major currencies.

And there may be more renminbi weakness to come, given the US will start implementing a 10% tariff on $200 billion of Chinese goods on September 24 – this after slapping tariffs on $50 billion of Chinese goods already earlier this year.

As it is official Chinese GDP growth in the second quarter was the slowest since the third quarter of 2016 at 6.7% year-on-year, and it is expected by the IMF to continue trending down to 6.6% by end-2018 and 6.4% in 2019.

We asked the former chief investment officer of a major Chinese insurer, an asset manager CIO, and two economists whether the renminbi would continue to decline in the face of these external and internal pressures, and just how low the Chinese currency could get in the next 12 months.

The following extracts have been edited for brevity and clarity.

Larry Wan, former chief investment officer (Shanghai)

AIA China

It is unlikely that the yuan will depreciate by more than 10% and it should range between Rmb6.5 and Rmb7.0 [against the dollar] in the coming year. Overseas investors ... do not have to worry too much about going into China because of the currency risk in the short term. [But] if, for whatever reason, the yuan drops in value, it should indeed be a good time to invest in the China market.

China’s trade growth has started to slow down after the rapid growth seen in the past decade. It was more than 20% ... every year but the number is now only in the teens, and in some isolated months it’s negative growth. Added to this, there is no continuous growth in foreign exchange reserves. So I think it is normal that the yuan is under some pressure.

But there is no need to be too pessimistic. It’s possible for the yuan to depreciate, but it should just be short-term as the basis for the depreciation is not strong. China is different from Turkey and Argentina, which are smaller economies and have limited exports. China has larger and more stable exports. The country is not an exporter of raw materials ... [and] even if there are fluctuations in the yuan, they won’t be too big. Overall, China’s exports will at least maintain a single-digit growth in exports in the coming few years.

Christina Bastin, portfolio manager  (London)

Muzinich & Co

Our outlook on the RMB until the year-end is based on two assumptions.

The first assumption is that trade war tensions between the US and China will continue into the year-end. There is a planned meeting between the two presidents in November but we do not think there will be a decisive positive outcome. We think tensions will continue and that things need to get worse before they can get better.

The second assumption is that the US will continue with its telegraphed rate hikes, which we believe the market is still not fully pricing in.

Therefore, in our view there is room for the RMB to drift lower gradually, easily nearing 7 by year-end.

The reason we believe the currency will not depreciate dramatically is that Chinese policymakers are keen to avoid a repeat of 2015 when capital outflows exacerbated so much that it caused a loss of confidence in China. Currency is a symbol of a country’s credibility. A dramatic slide undermines that.

We believe trade war tension will continue because the actual tension is not the trade surplus per se, but what it symbolises to Trump and US policymakers. It symbolises the grudge that Trump has towards China and that China has grown its economy through uncompetitive government policies.

 “Made in China 2025” is China’s policy of subsidising/cultivating strategic sectors through cheap funding and protection. In our opinion, the US is also interested in having a piece of the hitherto protected financial services sector to foreign investors.  We believe intellectual property protection is also important to Trump. These are not easy to negotiate by year-end.

AXA Investment Managers

The renminbi has come under considerable pressure lately due to a combination of external and internal headwinds.

On the external front, the strong dollar rally, coupled with escalating trade tensions with the US has weighed on investor sentiment, paving the way for a significant renminbi deprecation in June-July.

Internally, easing growth momentum, together with concerns over the impact of deleveraging, has led the Chinese authorities to relax policies to support the economy. The subsequent divergence in growth and monetary policy outlook between the US and China has also contributed to the currency weakness.

But after its initial surge, the renminbi-dollar rate appears to have hit a ceiling, stuck in the Rmb6.80-Rmb6.90 range over the past two months. While the lack of further dollar strength clearly helped, we think the efforts by Beijing to stem speculation and anchor market expectations have played a bigger role in restoring stability.

Given that a lot of bad news appears to have been priced in and Beijing has actively defended the currency, we see limited upside ... in the near-term barring any major deterioration in external (e.g. trade) and internal (e.g. growth) conditions. 

However, with the macro environment still challenging and the economic divergence between China and the US likely to persist, the depreciation pressure on the renminbi will remain. We think the odds of the renminbi-dollar exchange rate breaking Rmb7.00, while limited in the near-term, are non-trivial over the coming 6-12 months.

Andy Seaman, chief investment officer (London)

Stratton Street

We think it’s unlikely that the renminbi will depreciate from here for a number of reasons. Firstly, the Chinese authorities have made it very clear they do not intend to weaken the exchange rate to offset the tariffs. From a fundamental perspective the currency is well supported with the relative current account positions strongly in China’s favour. 

But there is also a tactical reason. It’s generally assumed that increased tariffs will hurt exporters but this isn’t necessarily the case; importers can be hurt just as badly. So far, the US has exempted popular goods like phones and computers but the rhetoric from the US administration suggests a next step could be to impose tariffs on all imports from China, which would mean that these goods would be hit as well. This would be unpopular in the run up to US mid-term elections but it would also be damaging for US firms.

So it is not obvious that weakening the renminbi would be in China’s interests either from a fundamental point of view and may actually undermine China’s negotiating position. Our conclusion is that both sides (and the world) will be losers in this particular war, but it is the US that’s likely to be the biggest loser.     

The recent low this year against the dollar was Rmb6.9471 and given the re-introduction of the “counter-cyclical adjustment factor”, it seems extremely unlikely that this level will be breached again, given the close proximity of the psychologically important level of Rmb7.0.

Dong Chen, senior Asia economist (Hong Kong)

Pictet Wealth Management

First of all we don’t think the [People’s Bank of China] will use a renminbi devaluation as a weapon in the US-China trade war. 

The main concern is that a devaluation (or massive sustained depreciation) could create financial instability, which would likely outweigh any benefits from a weaker currency. As a result, we believe the PBoC has the intention and the capability to keep the renminbi index at a largely stable level (roughly at the same level of the 2016-2017 average).

And when the renminbi-dollar exchange rate approaches sensitive levels such as Rmb7.0 we believe PBoC will intervene.

Currently we believe it will not breach Rmb7.00 in the next 12 months, so that's how far we expect it to go. 

Actually, given our bearish view of the US dollar over the next 12 months we expect the renminbi to strengthen against the dollar in one year’s time. Our current 12-month forecast for the renminbi-dollar exchange rate is Rmb6.40.

Daryl Liew, head of portfolio management (Singapore)

Reyl 

I believe the future movement of the renminbi is heavily dependent on the US dollar, as the renminbi has generally moved in line with the USD index (chart attached) over the past 12 months. The sharp 9% depreciation in the renminbi from April to mid-August coincided with an 8% appreciation in the US dollar and was in line with weakness in other Asian currencies like the Taiwanese dollar and Korean won. T

The US dollar has shown signs of topping out in recent weeks’ and this has helped the renminbi stabilise. With the US dollar already having priced in a lot of the good news such as the strong US economy and interest rate differentials, I believe further strengthening of the US dollar is unlikely for this year and this will ease the pressure on the renminbi.

While there is a risk that the renminbi may be allowed to weaken further should US-China trade tensions worsen, I do not expect a big adjustment.

I think the Chinese government would like to maintain a strong currency in order to achieve its goal of rebalancing the economy towards consumption as well as to prevent outflow pressure. As such, I think when the currency reaches 7 against the US dollar, that could be where the government may step in to intervene.