(Bloomberg) – The yuan is on course to depreciate this year as risks to economic growth ended two straight years in gains.
Most read by Bloomberg
The resurgence of Covid lockdowns and rising commodity prices cast doubt on China’s 5.5% growth target this year. The prospect of further monetary easing at a time when central banks around the world are raising interest rates is likely to accelerate capital outflows and further erode the yuan. The People’s Bank of China’s tolerance of the yuan’s strength is also fading. It made the biggest push last week to weaken the currency through fixings.
While a weaker yuan could help boost exports, a sharp drop could spark panics over financial stability and dull Chinese assets, although some strategists see it as a boon for the country’s bonds. A global exodus from Chinese markets last week prompted a raft of supportive promises from policymakers.
“The renminbi has passed an inflection point,” said Hao Hong, head of research and chief strategist at BOCOM International Holdings Co. It will continue to weaken, but the pace will be controlled by the PBOC, he said, adding that a weaker yuan will Spread recovery costs among China’s trading partners and neighbors.
The yuan fell 0.9% in March and is facing its biggest drop since May 2021. It remains Asia’s best-performing currency this year with the smallest loss against the greenback, which has been supported by bets that the Federal Reserve will cut interest rates half a year could increase percentage point at its next meeting, if necessary.
In contrast, a median of forecasts by economists polled by Bloomberg shows that the PBOC could cut banks’ reserve ratio by 100 basis points to 10.5% by the first quarter of next year. UBS Group AG lowered its growth forecast for China this year from 5.4% to 5%. Morgan Stanley is now forecasting a 5.1% gain versus 5.3% as Covid containments weigh on the economy.
The story goes on
“This round of Covid-19 resurgence is likely to hurt not only services but also industrial production and trade growth,” said Jingyang Chen, Asian FX strategist at Hong Kong & Shanghai Banking Corp. The yuan is likely to be on the decline in the short term and could fall to 6.45 per dollar by the end of the year, she said.
The dollar onshore yuan option implied volatility shows a 70% chance that it will fall to 6.5 per dollar by the end of the year. It fell 0.1% on Tuesday to 6.37 per dollar, while the offshore yuan was little changed on Wednesday at 6.38 per dollar.
Short rally
The yuan rose the most since December on March 16 on a historic rise in Chinese stocks, as the top fiscal committee led by Vice Premier Liu He vowed to stabilize struggling financial markets and boost the economy. A report that Saudi Arabia is trying to price some of its oil exports in yuan also helped.
However, the currency erased those gains as the average gap between the People’s Bank of China’s daily yuan reference rate and market estimates widened to 68 basis points last week, the highest on record since Bloomberg began polling analysts and traders in 2018.
The PBOC’s weaker fixings may also aim to correct the divergence in the onshore and offshore yuan, which widened last week to its strongest since June, a former State Administration of Foreign Exchange official said. The onshore unit is being supported by dollar selling by exporters, while the offshore unit is being weighed down by inventory outflows, Guan Tao, who is now a member of the China FX Committee, said in an interview.
“China’s export growth is likely to slow more significantly in the second half, and a gradual partial reopening of borders – expected to start later this year – could lead to a widening of the services trade deficit,” said Ju Wang, head of Greater China FX and Rates Strategy at BNP Paribas SA. Wang expects the yuan to fall to 6.60 per dollar by the end of the year.
Portfolio investment by bank customers turned into a $32 billion deficit in February, beating the previous record set in March 2020 at the start of the pandemic, monthly data on cross-border flows released on Friday showed. This was partly due to a record fall in bond investors from Chinese debt.
While HSBC’s Chen sees the yuan’s “overvaluation and lower yield advantage” weighing on hedging behavior by companies and portfolio investors, the Australia & New Zealand Banking Group expects the real yield differential between the US and China to support the yuan.
“Although strong trade surpluses will ease over the course of the year, we see portfolio inflows remaining resilient,” wrote Khoon Goh, head of Asia research, in a statement. February’s foreign bond outflows and the sell-off in onshore stock markets were temporary, he said.
(Updates with currency movements in the eighth paragraph. An earlier version of the story corrected the reserve ratio requirement forecast in the sixth paragraph.)
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP
Comments are closed.