USD/CNY: Divergent China-US economic outlook to pull the yuan back down – CE

The renminbi has strengthened against the US dollar this month. But, with the growth trajectories of China and the US likely to continue to diverge as the year goes on, economists at Capital Economics doubt the renminbi’s recent rebound against the US dollar will continue.  

An increasing contrast in the directions of the US and Chinese economies to weigh on renminbi

“In the US, we expect rapid growth thanks to the economy reopening and large fiscal stimulus. By contrast, China’s economic recovery from the virus is now largely in the rear-view mirror. We expect growth there to be much lower than it has been over the past year as the economy returns toward its pre-virus trend, policy support is withdrawn, and the pandemic-related boost to the country’s exports fades.”

“We think the spread between the two countries’ long-term bond yields will begin to narrow again before too long. We think the spread between 10-year government bond yields in China and the US could still narrow quite significantly from here; we forecast it to be almost zero by end-2022, compared with ~160bp currently.”

“We think the eventual narrowing of China’s massive current account surplus – which probably boosted the currency last year –   will hold back the renminbi as the global economy continues to return to normal.”

“We expect the recent strength in the renminbi to prove short-lived: we forecast USD/CNY to finish 2022 at 6.90, compared with ~6.50 at present.”