The renminbi has fallen sharply against the US dollar over the past few days. While some investors have been expressing concern, Bank of China argues that the slide will be temporary and that we can expect a recovery in the Chinese currency later in the year.
Rate hike expectation and a weak euro are some of the key reasons behind the strength of the US dollar and the weakness of the renminbi.
But income growth and consumption expenditure have been slowing down in the United States. A strong dollar may also hurt US export competitiveness. The Federal Reserve may therefore have limited room to tighten, Bank of China says.
Given that the chance of Greece leaving the eurozone is low, a rebound of euro from the selloff triggered by European Central Bank’s massive quantitative easing scheme is possible.
With the US dollar index up 12.8 percent last year and another 5.4 percent so far this year, there is also the risk that the US dollar is becoming overbought.
On the China side, the government’s stimulus policies may start to yield results in the second half, which will be good for the renminbi.
Other efforts, including “One belt, one road” development strategy, the plan to reduce administrative control and delegate more power to local governments will also bring positive impact.
Elsewhere, a positive A-share market outlook would improve financing access for corporates and create a wealth effect. A rebound of the property market and weak oil prices will also benefit the mainland economy.
The People’s Bank of China (PBoC) has announced that it will promote renminbi internationalization in an orderly manner. A stable currency is crucial to gain global markets’ confidence if China wants its currency to be more widely accepted in the world and used for forex reserving, investments or trade settlements.
As the currency becomes more international, it will drive up the market demand.
Meanwhile, the PBoC intends to push for the addition of renminbi into the basket of currencies in IMF’s Special Drawing Rights at the end of this year. Given this, the currency should be well supported.
Finally, balance of payment aids a recovery of renminbi as China’s current account surplus is expected to stay above US$200 billion this year.
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