FX Viewpoint | USD-RMB: More two-way movement, not a downtrend | Article – HSBC VisionGo

USD-RMB: More two-way movement, not a downtrend
Finance  ·    ·  6 mins read

  1. The recent measures and comments out of China suggest a policy preference for broad RMB stability, in our view
  2. Cyclical developments, such as slowing growth and narrowing yield advantage, may weigh on FX inflows 
  3. We expect USD-RMB to have more two-way movement and then rise slightly later this year

China’s FX policy strives for broad RMB stability

USD-RMB broke the 6.40 level in late May (Bloomberg, 3 June 2021). We believe the recent comments and countercyclical measures out of China (with some examples listed below) suggest that, while there is no line in the sand, there is still a policy preference for basic stability of the RMB exchange rate.

  • On 31 May, the People’s Bank of China’s (PBOC) announced that the required-reserve ratio on financial institutions’ foreign currency deposits will be increased from 5% to 7%, effective 15 June 2021. This is the first hike since May 2007 when the RMB was facing strong appreciation pressures after the 2005 de-peg.
  • On 23 May, the PBOC reiterated that it will maintain the exchange rate at “basically stable” levels, according to PBOC Vice Governor Liu Guoqiang in a Q&A segment posted on the PBOC’s website. Subsequently, the PBOC issued another statement on 27 May on its website, which stated that under the current RMB FX mechanism, the exchange rate will not be used to stimulate exports (via depreciation) or tackle rising commodity prices (via appreciation). 

Slower growth, smaller yield advantage, and narrower current account surplus may weigh on FX inflows in 2H21

We do not believe the recent downward momentum is the beginning of a long-term RMB appreciation trend. Cyclical indicators are pointing to a likely slowdown of GDP growth and smaller yield advantage for China in 2H21. China’s current account surplus is already narrowing, amid deteriorating terms of trade (due to high commodity prices). In 2H21, demand for China’s exports could moderate, as developed markets (DMs) open up and redirect spending to services. COVID-19 developments in other emerging markets (EMs) means exports may also improve by then. We expect these cyclical developments to see net FX flows to China moderating in 2H21.

The Fed’s tapering announcement could come at the end of the year, in our economists’ view

Broad USD weakness may be tested, if the Federal Reserve’s (Fed) tapering debate picks up later in the year and some of the generous USD liquidity conditions could subside later this year. Our economists expect an official tapering announcement at the end of the year and implementation in 2022.

China remains focused on capital account liberalisation

Finally, we think that China’s broad FX framework has not changed, namely two-way capital account liberalisation is maintained with the aim of achieving a balanced flow. Our base case sees USD-RMB exhibiting more two-way movement and then rise slightly later this year, when China’s outbound investment liberalisation accelerates, likely in 2H21.

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