Survey shows don’t bet on China’s yuan falling past 7 soon

By BLOOMBERG

HONG KONG • China is unlikely to let the yuan weaken past the key psychological level of seven per dollar any time soon, according to market observers.

Just three of 18 traders and analysts surveyed last Wednesday and Thursday said the Chinese currency will breach that milestone in 2018, though a majority see it happening by the middle of next year. Falling beyond seven for the first time in a decade would further strain relations with the US and spur capital outflows, some respondents said. The yuan fell 0.37% to 6.9146 per dollar last Friday.

The yuan edged close to seven last week after the People’s Bank of China (PBoC) announced a cut to the reserve requirement ratio for a fourth time this year, reflecting a growing divergence with US monetary policy.

Pressure on the currency, which has tumbled 9% over six months, eased in the past few days amid reports US President Donald Trump and his counterpart, Xi Jinping, plan to meet in November and that US Treasury Secretary Steven Mnuchin is being advised not to name China a currency manipulator.

“We expect that the trade uncertainty will keep the yuan weak, but the Chinese authorities likely want to avoid a situation of snowballing negativity surrounding the currency,” said Julian Wee, an investment strategist at Credit Suisse Private Banking in Singapore.

“Existing capital controls and improving economic data from policy stimulus should help to partially counter the negative impact of the trade tensions.”

Including the three who see a break of seven this year, 11 respondents expect the yuan to pass that mark by the end of June, citing reasons from a stronger greenback to a worsening trade conflict. There’s some disagreement on the consequences of a move beyond seven:

Mizuho Bank Ltd’s Ken Cheung said falling past that level would be “catastrophic to China’s economy and financial stability”, while Standard Chartered plc’s (StanChart) Ding Shuang doesn’t foresee large outflows due to capital controls.

Here are some highlights of respondents’ views:

• Mizuho Bank (Cheung, senior Asian currency strategist): The yuan won’t likely break seven this quarter; the PBoC will use “every means” to defend the currency, such as intervention and tighter capital controls. Outflows and overshooting yuan weakness would be “catastrophic” to the economy and financial stability. Foreigners would hesitate to invest heavily onshore if the yuan passes seven.
• StanChart (Ding, Greater China and North Asia chief economist): Will likely breach seven by the end of March; China may hold the line this year to keep the door open for trade negotiations with the US and to prevent individual investors from buying foreign currency. Large outflows may not materialise even if the yuan hits seven, as China may tighten control. A fall past seven could lead to weakness in emerging- market currencies.
• United Overseas Bank Ltd (Heng Koon How, head of markets strategy): Could break seven in the first quarter, when exports may see more significant negative impact from the trade conflict. China will continue to apply targeted fiscal stimulus and monetary support, which will keep the currency weak. The PBoC will try to ensure stability in the exchange rate and limit the pace of depreciation; there’s a risk that outbound investment quotas will be temporarily reduced or suspended. Once the yuan breaks seven, stay cautious on emerging-market currencies and expect volatility.

Bloomberg’s survey involved 12 strategists, economists and researchers based in Hong Kong, Shanghai, Beijing and Singapore, and six currency traders at Chinese banks.