AsianInvestor’s editorial team set out this month to ask and answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.
Here we present our response to question number three, with the other forecasts so far listed at the end of the article. The feature appears in full in the forthcoming (February) issue of the magazine.
Question 3: Will the RMB continue to depreciate against the dollar?
The Year of the Monkey will witness high volatility for the redback. Beijing has signaled its intention to allow the currency to reflect prevailing economic conditions in the country, so it will continue to weaken. This being China, the Peoples’ Bank (PBoC) will continue to intervene to curb excessive speculation in the offshore (CNH) market.
A weaker RMB will boost Chinese exports, but the key stimulus needs to be managed at home, with the PBoC maintaining monetary easing in support of growth, while ensuring a smooth debt-to-bond swap programme for local governments. Lower interest rates reduce the appeal of the currency, but that’s the compromise the Chinese government is ready to make.
Depreciation is also justified as in the long term the RMB has to find its true value against a broad-based basket of currencies. The ideal approach to achieving price equilibrium, theoretically, would be to allow a quick devaluation. But that could spark a regional currency war.
As the RMB depreciates, foreign investors may shun RMB-denominated assets, while onshore investors seek overseas investments in US dollars. But there will come a time when the currency reaches a point of equilibrium and confidence is restored.
In China's idealised view, if not reality, the RMB will be stabilised by the time China hosts the G20 meeting of finance ministers and central bank governors in Shanghai at the end of February.
Given that convergence of onshore and offshore RMB rates is a requirement for inclusion in the IMF’s Special Drawing Rights (SDR) basket by October 1 this year, the PBoC can be expected to intervene in the more volatile CNH market to keep the basis between the exchange rates within a range.
FX strategists are predicting 6.7 to 6.9 for dollar-RMB by the end of 2016, equating to a 3-6% depreciation from current levels. It depreciated roughly 6% versus the US dollar last year.
Other predictions so far: