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The renminbi has gained 9% against the US dollar since last May but the factors that underpinned this appreciation have faded. With US yields moving in the dollar’s favour and China’s economic outperformance set to diminish, analysts at Capital Economics now expect the renminbi to soften a bit over the coming quarters.

Key quotes  

“In normal times, an upswing in global growth would be good for Chinese exports and, all else equal, the renminbi. But much of the recent strength in Chinese exports reflects surging demand from households in lockdown that will stall or reverse as vaccines allow a return towards normality.”

“Even after the recent jump in US yields, the spread still points to modest renminbi gains. But that will change if US yields continue to rise, as we now expect. We also think that, if anything, long-run yields in China will decline over the coming year or two, as the bond market starts to price in weaker growth and the likelihood of future monetary policy easing. By the end of 2022, we think the China yield premium could hit a decade low.”

“The PBoC would probably welcome some modest depreciation to support exports and growth. That said, the central bank still prefers to lean against large moves in either direction, making an abrupt depreciation unlikely. While it has not deployed its FX reserves in years, most signs suggest that the PBOC directed state banks to push back against appreciation in recent quarters.”

“We now expect the renminbi to weaken from 6.54/$ currently to 6.70 by year-end and 6.90 by end-2022 (our previous forecast was 6.20 for both years). This leaves us more bearish than most analysts, at least over a two-year horizon.”