The Chinese currency, the yuan (CNY) or renminbi, is expected to become more market-oriented and to depreciate against the strong US dollar in 2015 and 2016, according to HSBC Global Research.

“We have revised our USD/CNY forecast to 6.34 and 6.44 by end-2015 and end-2016 respectively (from 6.22 and 6.30).

“We believe a 2% to 3% spot renminbi depreciation against the US dollar is acceptable to Chinese policymakers in the face of a strong US dollar trend and will not derail the renminbi’s internationalisation goal,” said HSBC’s research report.

The USD/CNY rate stood at 6.25 in late trade today.

The research house alerted investors to take note that the Chinese currency’s one-way appreciation seen in the past “has come to a stop”. In 2014, the yuan weakened against the dollar for the first time since the 2005 de-peg. The currency has been trading with greater two-way flexibility.

HSBC Global Research noted that there is still a lot of foreign “hot money” in China and its outflow could have an impact on the yuan.

The research house estimates there were outflows of US$175 billion (RM626.6 billion) of “hot money” between May and December 2014, compared with US$310 billion of inflows between September 2013 and April 2014. This means there is still US$135 billion of hot money in China.

“This residual hot money could be reversed in the coming months. If so, this could take another six months for the foreign exchange (FX) market to digest … In other words, USD/CNY could see more upward pressure in the near term before stabilising in 2H2015,” it added.

HSBC Global Research said China’s FX policy is increasingly gaining focus, especially after global central banks excessively loosened their monetary policies.

On whether China will purposely weaken the yuan, HSBC opines, “China is unlikely to do this, as it would go against the authorities’ commitment to economic rebalancing and structural reforms”.

The research house believes the People’s Bank of China will not directly target a weaker yuan, but will actually tolerate some appreciation while letting the exchange rate become more market-driven.

“China’s share of global growth and trade has risen rapidly in the last few decades, a large yuan depreciation would be disruptive to global trade flows and international relations,” it said.

“Indeed, were China to actively weaken the yuan, it may even require some kind of global currency accord, as seen in the 1980s.”