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Want to bet the renminbi appreciates in 2019?

The bearish views that prevail about the renminbi weakening further against the US dollar in 2019 are likely ill-founded. Indeed, various factors could contribute to the renminbi appreciating this year, says BNP Paribas AM.

The renminbi fell by 5.71% year-on-year against the US dollar in 2018 on concerns over slowing domestic growth clouded by domestic debt reduction efforts, a trade war with the US and a shrinking current account surplus (estimated at only 0.8% of GDP for full-year 2018).

Financial markets are predominantly bearish on the renminbi, with many participants expecting it to weaken beyond 7 per USD in 2019.

Why bet on the renminbi appreciating then? Basically because markets appear overly bearish on China’s balance of payments position, underestimating the financial account inflows and exaggerating the fears over capital outflows.

Capital flow dynamics

The flow support for the renminbi from the current account has dwindled along with the surplus. Net foreign direct investment inflows have also dropped. Hence, the estimated basic surplus has dropped to below 1% of GDP. Many market participants are forecasting a current account deficit this year.

However, China’s external balance may not be so bearish. Firstly, China has accelerated the opening-up of its markets to foreign investment and has pledged to improve its behaviour on structural points of contention such as industrial production protection and forced technological transfers. Combined with still-stringent capital controls, this may boost net FDI inflows.

Secondly, a slowing economy will constrain China’s imports and slow the growth of its services trade deficit by slowing outbound tourism. Meanwhile, it has diversified its exports beyond the US to other countries, notably the Belt & Road Initiative countries.

So, export growth in 2019 may not drop, or at least not by as much as the market expects in view of the Sino-US trade dispute. All this should help keep the current account and basic surpluses from further erosion, or even boost them.

Read more details of BNP Paribas Asset Management’s Greater China economist’s analysis and expectations of the renminbi’s likely behaviour as 2019 unfolds.


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