Why is there a fall in China’s RMB?
There is a fall in the RMB against the US dollar and this is the focus of analysts who are poking into the problem to find what is causing this devaluation of the Chinese currency?
China is a key market focus since Russia invaded Ukraine, with the war triggering large foreign investors outflows that began in the immediate aftermath of the invasion. But this have since abated.
Investor focus has recently been heightened by a rapid devaluation of China’s Yuan against the Dollar, with pace and scale of devaluation comparable to the “step” devaluation in August 2015, which sparked a cycle of devaluation expectations and capital outflows.
The International Finance Institute says it compared the devaluation now to what happened in 2015 with the conclusion that the situation is quite different.
“We compare the devaluation now to what happened in 2015 and conclude that the situation is quite different. Our best interpretation of recent higher $/CNY fixings is that they are a belated offset to the sharp rise in USD, which has dragged up RMB in trade-weighted terms.
“Thus, we don’t see recent weakening against the Dollar as the start of a devaluation cycle, but as a one-off adjustment that leaves trade-weighted RMB roughly where it was before the war. It is the case that COVID shut-downs are weighing substantially on growth.
“We are cutting our 2022 growth forecast to a below- consensus 3.5 percent from 5.1 percent previously. This downgrade adds to mounting global recession risk, given that our one percent growth forecast for the Euro zone – which we published shortly after the start of the war – is a de facto recession call,” it says in its latest analysis.
RMB and the Dollar
Weakness in China’s Yuan versus the Dollar rivals the “step” devaluation in August 2015, which profoundly shook markets at the time (Exhibit 1) – above.
However, beneath the surface there is an important difference with the 2015 episode. Recent devaluation against the Dollar has returned the trade-weighted RMB to where it was before the start of the war, so this episode is more of a one-off realignment rather than signaling a sustained devaluation cycle.
“Our best interpretation is that policy makers in China were surprised by the rapid surge in the Dollar since war broke out, something that they are now – belatedly – addressing with higher $/CNY fixings (Exhibit 2) – above.
“Of course, it is the case that COVID shutdowns are weighing on growth materially, with weaker data in manufacturing (Exhibit 3) and services (Exhibit 4),” it says.
This is pushing rate differentials against the RMB, although the link to capital flows and $/CNY is weak. As a result, weaker growth is not per se a catalyst for meaningful RMB devaluation.
Growth forecast
“We are downgrading our growth outlook substantially. Our very own Gene Ma has moved his 2022 growth forecast to a below- consensus 3.5 percent, down from 5.1 percent previously.
“This does not equate to an RMB devaluation cycle, however, because China’s experience with RMB devaluation is tricky. 2015 saw large capital outflows build (Exhibit 5), as depreciation expectations took hold. We think China is acutely aware of this risk, especially in the current unsettled global environment.”
More broadly, China’s current account surplus is on a rising trend (Exhibit 6), something that COVID shutdowns and GDP contraction will only reinforce, by weighing on domestic demand and import volumes. We therefore do not anticipate a meaningful RMB devaluation cycle from here