Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 28): The renminbi is headed for a volatile and challenging new year amid persistent capital outflows, a strong US dollar and uncertain US-China relations, HSBC Global Research opined.

In its Asian foreign exchange (FX) note last Friday, HSBC Global Research said the renminbi is expected to depreciate further as capital outflows remain strong, with higher volatility in the first half of 2017 (1H17) on the back of the new US administration.

According to the note, capital outflows are expected to persist as China embarks on asset diversification and confidence in the renminbi wanes.

"These outflow pressures will become more acute if the strong US dollar environment persists," HSBC Asian FX strategists Joey Chew and Alastair Pinder said.

Although the renminbi is expected to remain volatile as markets digest new policies by the Donald Trump-led US administration, the analysts doubted a serious trade conflict would escalate between the two countries.

"We believe the US will not impose broad-based punitive tariffs on Chinese imports. The prospect of retaliation by China should serve as a deterrent," the note said.

Meanwhile, the analysts also opined that the People's Bank of China would moderate the pace of decline in its FX reserves in 2017.

"To manage the pace of renminbi depreciation, the authorities will likely lean more on regulatory controls of capital flows (and on volatile offshore rates) than on FX reserves," Chew and Pinder said.

"Despite the challenges, we believe China has the economic ammunition and political will to manage the pace of renminbi depreciation appropriately," they noted, adding that the case for a weaker exchange rate is clear, but the extent of depreciation is not.

HSBC Global Research expects the renminbi to stabilise later in 2017 as the 19th national congress of the Communist Party of China, which will likely be held in October or November, is likely to see a policy preference to avoid economic volatility including the exchange rate fluctuations during that period.

Going forward, the research house also predicted the daily US dollar to renminbi rates would become more independently determined.

"We forecast the USD-renminbi at 7.20 by year-end 2017," they said.

"As a major currency, the renminbi should be charting its own course, rather than mechanically reflect developments in the US dollar nominal effective exchange rate," HSBC added.

The analysts opined that a more freely floating renminbi would be the logical long-run solution to China's "trilemma" between balancing its monetary policy, capital flows and exchange rate.

 

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