The asset manager for a changing world

What a difference two months make. The renminbi rose by more than 3% against the US dollar from end-2018 to March 2019, but many people seem to have forgotten all about this now, focusing instead more on its weakness. At the time of writing (23/05/2019), the Chinese currency is trading at 6.9063 per USD, down by 0.7% so far this year.

Market participants are once again betting on the renminbi falling through the 7 per USD level as trade war risk escalates, market concerns about weaker Chinese growth flare and amid talk of more Chinese policy easing measures.

One persistent assumption is that the Chinese central bank would defend the 7/USD level by using its reserves to intervene, while I have argued that for the People’s Bank of China, there is no line in the sand at 7/USD. [1]

I have not changed my view on the PBoC’s currency policy [2]

Acting to brake the renminbi’s fall

Indeed, my estimate of the counter-cyclical factor in the PBoC’s fixing shows that the central bank has intervened to slow the depreciation (see exhibit 1). This is strong evidence of a no-devaluation policy; otherwise the counter-cyclical factor should have recorded large positive values in the chart. [3]

The main reason for a no-devaluation policy is obviously Beijing’s concern over such action triggering massive capital outflows, damaging investor confidence and sharply reducing liquidity in the economy and hurting GDP growth further.


Arguably, a stable renminbi is linked to stable GDP growth. But keeping the currency stable does not mean the PBoC is targeting a certain CNY/USD cross-rate, as market participants have assumed time and again. The renminbi’s two-way volatility has increased sharply since 2016, underscoring reform measures to allow for greater FX flexibility. This means that the PBoC would not burn currency reserves to defend the exchange rate at any particular level.

A further dip is a near-term possibility, but so is an eventual recovery

The escalation of trade war risk and a policy shift towards more easing suggest that the chance of the CNY/USD cross-rate breaking 7/USD in the near term is high.

At this point, though, I am not changing my year-end 6.65 CNY/USD forecast because of the extremely volatile trade talks. When the renminbi can fall 3% against the USD in just a few days as the trade negotiations turn sour, it can also rebound by as much, or more, when the negotiations turn positive. Market sentiment can change by the nanosecond.

And readers should not forget that the renminbi is still supported by China’s current account surplus [4], which in my view may even grow this year, as opposed to the market consensus expectation of a deficit. Furthermore, portfolio inflows stemming from international stock and bond index service providers adding Chinese assets to their benchmarks should also underpin the currency.

What we may see then is the renminbi weaken to, say, 7.1/USD, or by 2.8% from the current level, in the coming weeks if the trade negotiations get tougher. Our base case remains that an agreement to reinstall a ‘trade truce’ emerges in coming months so that the negative renminbi sentiment, and the pressure on the exchange rate, would reverse.

1 “Chi Flash: What if the renminbi breaks the 7 threshold?”; November 2018

2 “A phantom currency war may force a trade war truce”; May 2019

3 “Chi Time: Suspicion about PBOC FX policy shift”; July 2018

4 “Chi on China: The fuss about China’s current account deficit and global cost of capital”; April 2019