Much has changed for the renminbi this year. It started off strong, but then policy-induced volatility brought about some depreciation pressure. That said, the currency’s internationalization process has remained intact.
The Chinese unit started recovering in June but remains an underperformer year-to-date. The onshore rate and offshore rate ranked 138 and 109 out of 176 currencies in their performance versus the US dollar in year to date, as tracked by Bloomberg.
In a research note, HSBC predicts that the renminbi will strengthen moderately versus the greenback in the second half to reach 6.14 by year-end, due to stabilizing economic growth and supportive trade flows.
Exports and imports rebounded since May. China’s trade surplus in the first six months this year was US$103 billion, only slightly lower than the year-ago level of US$108 billion. Considering that the nation’s trade surplus tends to be back-loaded, the trade balance should be more supportive of the renminbi in the second half, HSBC notes.
But the broader trend is for a narrower current account surplus. Indeed, China’s current account surplus has thinned to 1.5 percent of GDP in the first quarter, the lowest since 2002.
This is because the non-goods trade accounts have registered bigger deficits due to increased tourism spending overseas. The income account is in deficit also because the nation pays more dividends on foreign direct investments than the income received from investing its foreign exchange reserves.
The recovery could also be tempered by capital account outflows that started in the second quarter, HSBC adds.
Going forward, the bank expects the Chinese currency to trade with greater volatility amid capital account liberalization, and an upcoming shift in the US interest rate outlook.
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