Date
20 January 2017
Now that the renminbi has been included in the IMF Special Drawing Rights basket, the Chinese central bank will intervene less in the currency's onshore and offshore prices. Photo: Bloomberg
Now that the renminbi has been included in the IMF Special Drawing Rights basket, the Chinese central bank will intervene less in the currency's onshore and offshore prices. Photo: Bloomberg

Two-way volatility of renminbi is new normal

China posted disappointing trade data for November, representing the negative impact of weak global demand on Chinese manufacturing.

More signs of economic slowdown make people doubt whether China can accomplish its target of a 7 percent GDP growth rate.

The government must roll out more stimulus measures to boost domestic demand to offset weak external demand.

Meanwhile, the downward trend in the prices of commodities is also raising concerns. Investor appetite for risky assets is declining further.

In risky asset classes, oil price has a higher correlation with economic activities.

The OPEC has rejected calls for the oil cartel to lower its output target, thus worsening the oversupply in the market and price decline.

Besides weak demand from China, a leading oil consumer, the declining oil price is also having a huge impact on oil exporting countries.

The oil price dropped to its lowest since March 2009. Energy sector stocks are under downward pressure, dragging down US stock market indexes.

Risk-averse funds are raising their treasury bond allocations. US Treasury bond yields are decreasing as a result.

The dollar index is also affected. It closed at 97.223 on Thursday, marking a one-month low.

But with strong US employment data, it is almost certain that the Federel Reserve will raise its interest rates next week. The capital market is likely to come under pressure again.

When the interest rate hike will come is not as important as the pace of increases in the future.

As global energy prices go down and demand remains weak, Fed chief Janet Yellen may adopt a slow pace of rate increases. The rising dollar is likely to face headwinds.

The renminbi continues to depreciate amid weakness in the greenback. And as capital flows out of China ahead of the US rate liftoff, the latest economic data is also affecting market sentiment.

The Producer Price Index shows the emerging deflation risk and the destocking pressure on the industrial sector.

To avoid deflation, China will have to unveil more easing measures such as further cutting interest rates and lowering banks’ reserve requirement ratio.

Meanwhile, the opposite directions of the monetary policies in China and the United States are creating short-term downward pressure on the renminbi exchange rate.

The State Administration of Foreign Exchange said the capital outflow pressure eased in October, compared with the third quarter, as a result of effective policies and a stronger dollar.

It said market fundamentals remain healthy. And given China’s 6.5 percent economic growth, which is still higher than that of most developed economies, the renminbi doesn’t have to enter a long-term devaluation.

After the renminbi was included in the IMF Special Drawing Rights basket, the Chinese central bank will do less intervention in the currency’s onshore and offshore prices.

The two-way volatility of the renminbi exchange rate will become the new normal as China pursues its market-oriented reform process.

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MY/JP/CG

Senior investment strategist and vice president, treasury & markets division, DBS Bank (Hong Kong)

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