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Amy Yuan Zhuang, Research Analyst at Nordea Markets, notes that China’s trade war with the US and currency fight has begun and due to capital flight concerns, the PBoC will defend the CNY against too deep weakening.

Key Quotes

“The trade war has limited initial growth impact but implies tense long-term relationship with the US.”

“The extensive CNY weakness against both the USD and the currency basket caught the market off guard.  The weakness is overdone, but correction might not happen until the end of this year.”

“The elevated near-term risk surrounding the trade war will likely  keep depreciation pressure on the CNY in the coming 3-6 months.  However, USD/CNY faces limited upside as the  PBoC will likely defend the level of 6.70  to avoid capital flight.”

Trade war with the US officially begins on 6 July, when the two countries levy 25% tariff on USD 34bn of imports from each other.”

“The announced  trade measures are estimated to have limited growth impact.  But the trade war is really the beginning of long-term rivalry for global supremacy.  The relationship between China and the US will likely remain tense regardless of the outcome of the trade war.”

“China’s domestic economy is still expanding, but we expect the uncertain export outlook and government efforts in deleveraging and cooling down the housing sector to  drag down H2 growth this year.”