This week we had a couple of RBC colleagues from Asia visit our foreign exchange desk in Los Angeles.
One of them was Sue Trinh, head of Asia FX strategy, and we took the opportunity to compare notes on the most pressing questions in Asia FX these days: What's behind the rise of the renminbi (RMB) and what is the future of the Chinese currency in both valuation and international adoption as a major currency?
As we have noted in this commentary, the RMB has appreciated by nearly 6 percent against the U.S. dollar this year.
There are two reasons for that:
- The USD has generally been weak for much of the year as the “Trump rally" faded shortly after the president's inauguration. This translated into lower expectations for rate hikes by the U.S. Federal Reserve during the first part of the year and a generally lower dollar.
- The Chinese government has been able to use levers at its disposal to engineer strength into its currency when much of the FX world expected it to weaken.
This intervention by the Chinese government has clearly set back the process of internationalization of the RMB. We have seen this in data and studies that show a retrenchment of the RMB's use for international trade payments and receipts. This certainly extends to additional capital investment from firms outside of China and as we note below, does not seem to be ready to shift course anytime soon.
So, where do we go from here?
Market expectations have been for a gradual weakening of the RMB.
RBC specifically has been looking for a rate of 7.50 yuan per dollar by the end of this year, but global economic events have clearly pushed that time frame out a bit.
Our View: Even with the recent strength the RMB has demonstrated, we continue to expect the currency to weaken for two reasons:
- Leverage: The amount of outstanding debt in China remains high, even as it has shifted from corporates to households and government.
- Lack of reform: The administration of Chinese President Xi Jinping has not delivered on expected economic reforms.
We will be watching the 19th National Congress of the Communist Party of China, scheduled for Oct. 18, for clues about any changes in the government’s strategy or direction going forward.
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