China: Renminbi to appreciate modestly against the dollar in coming quarters - Wells Fargo

According to analysts from Wells Fargo, the renminbi is likely to appreciate modestly against the dollar in the coming quarters,. They warn that a return of capital outflows like those seen in 2015 and 2016 as the renminbi depreciated could also weigh on the Chinese economy, should investors become worried about future growth prospects and/or move capital to countries with higher interest rates.

Key Quotes: 

“Economic growth remained steady in China through the end of 2017, up 6.8 percent in Q4 and likely buoyed by a solid consumer sector and improving international trade. However, our forecasts call for Chinese growth to slow over the coming years, likely due in part to an overall slowdown in investment spending. Although the initial acceleration in investment spending boosted productivity and supported robust economic expansion over the past decade, the resulting buildup of debt in China’s corporate sector remains an area of concern. Other risks to our growth outlook include the possibility of trade restrictions with the U.S. and increased capital outflows should investors become wary of a potential growth slowdown in China.” 

“Chinese authorities have shifted their exchange rate focus from the value of the renminbi vis-à-vis the U.S. dollar to the value of the renminbi versus a basket of currencies. That is, Chinese authorities are now trying to keep the renminbi more or less stable against a basket of currencies. Consequently, the U.S. dollar depreciated about 5 percent against the renminbi last year as the greenback experienced weakness against most major currencies.”

“Looking forward, the Wells Fargo currency strategy team expects that the dollar will continue to trend moderately lower versus most currencies as market participants begin to price in expected tightening moves by major foreign central banks. If, as we expect, Chinese authorities continue to maintain a rather stable value of the renminbi versus a basket of currencies, then the depreciation of the U.S. dollar versus most major foreign currencies implies that the renminbi will continue to appreciate modestly against the greenback in coming quarters.”

“Although our forecasts look for a slowdown in GDP growth to 6.4 percent in 2018 and 6.0 percent in 2019, we see these risks as largely manageable for the foreseeable future, as China’s growth continues to fall in line with that of more advanced economies.”