17 October 2018
Factors such as easy monetary policy and continued capital outflows are likely to push the renminbi lower against the greenback in the next few months. Photo: China Daily
Factors such as easy monetary policy and continued capital outflows are likely to push the renminbi lower against the greenback in the next few months. Photo: China Daily

Will the renminbi see more downward pressure?

The depreciation of the Chinese renminbi has been a hot topic in the market recently.

Since the People’s Bank of China (PBoC) introduced a 2 percent depreciation of the official daily midpoint fixing on Aug. 11 last year, the renminbi, in general, has stayed in a downward trend, despite interventions by the PBoC from time to time.

Recently, the pace of decline has accelerated after the redback was included in the International Monetary Fund’s SDR (special drawing rights) basket at the beginning of this month. The daily fixing tumbled to a six-year low of 6.7379 on Oct. 17.

Onshore and offshore yuan dropped to multi-year lows. Since early August, the yuan has lost about 9 percent against the greenback.

Has it fallen too much already? How far can it fall?

First, the ADXY index, which tracks the most active Asian currencies against the dollar, has eased 3.39 percent since August last year. The ADXY index weakened just 0.33 percent, excluding the yuan.

There is quite a bit of room for other Asian currencies to catch up with the decline of the yuan.

That, in turn, could lead to more downside for the Chinese currency.

Second, the US Dollar Index has been moving in the range of 93 to 100 points since early last year.

Given that the Fed is expected to hike interest rates again while other major central banks continue to expand their monetary stimulus policies, the US dollar may break out of the range and start another round of rally.

That would put pressure on the renminbi.

Third, China joined its peers in pumping money into the market in the aftermath of the 2008 financial crisis.

The country’s non-financial debt-to-GDP ratio hit 210 percent in the first quarter of the year, according to data from the Bank for International Settlements.

That level outstrips that of the US or Britain before the financial crisis and is close to the peak seen in Japan before its credit bubble burst in the 1990s.

China’s total social financing, a broad measure of credit and liquidity in the economy, rose by 1.72 trillion yuan (US$253.7 billion) in September, far above market expectations.

Outstanding total social financing reached 151.51 trillion yuan by the end of September, up 12.5 percent from from a year earlier.

Easy credit typically points to a weaker yuan, which is hence likely to weaken further unless the central bank reverses its monetary policy.

Fourth, the daily fixing reform in August last year completely altered the expectations of mainland residents and corporates that the yuan won’t depreciate.

As a result, they have tried all means to avert currency depreciation, such as outbound M&A deals, snapping up overseas properties and buying insurance or stocks in Hong Kong.

These moves are set to worsen capital outflow. In fact, China has recorded capital outflow of US$937.6 billion in a 12-month period ending September.

Market consensus is for the yuan to reach 6.98 against the dollar by the year-end and ease further to 7.03 in first quarter of next year.

This article appeared in the Hong Kong Economic Journal on Oct. 20

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal chief economist and strategist

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