One of the trades that looked like a no-brainer was betting on continued appreciation of the Chinese renminbi. In fact, so strong was the confidence in this outlook that China suffered from large-scale hot currency inflows (as recounted ably by Brad Setser) despite the official obstacles.
A top investment bank in China is now forecasting a small fall in the renminbi next year. Not only is that bad for US exports, bad for global rebalancing (a higher renminbi would do wonders to slow China’s destabilizing growth in foreign exchange reserves), but an exit of the hot money certain of either a revaluation upward or continued appreciation could have nasty knock-on effects for China.
The theory is that China will now try to keep the renminbi weak to preserve its exports. So far this is a lone forecast, but if it were to pan out, it would not be a good development. While not obvious, it would amount to a defacto race to the bottom in currencies.
From ChinaStakes (hat tip reader Michael):
China International Capital Corporation (CICC), a leading investment bank in China, expects RMB to fall against the USD by 2% next year.
Since the 2005 RMB exchange rate reform, or the even the beginning of RMB appreciation expectations in 2003, thoughts about any depreciation of RMB have never appeared in investment bank reports. But yesterday CICC Chief Economist Ha Jiming expressed just such expectation for the first time in a CICC report. “The RMB exchange rate against USD depends on the USD trend. Next year RMB may be 2% down against the USD.”
Recently, although many international investment banks have expressed pessimistic prediction on the Chinese economy, none has expected the RMB to depreciate.
Expectation for China’s GDP growth in 2009 has dropped to 8.7%, 8%, and 9% by Goldman Sachs, UBS, and Barclays, respectively, in reports issued early in October. Goldman Sachs also predicted China’s financial deficit in 2009 to be 2%, and Barclays 1.5%. But even with such pessimistic economic predictions, they still maintained their expectation for RMB appreciation. Goldman Sachs predicted RMB appreciation in 2009 to be 3%, while UBS expected the RMB/USD rate to rise by nearly 3% to 6.3. Barclays predicted “RMB appreciation will slow down”.
According to the report issued in August by Wang Qing, Greater China Chief Economist for Morgan Stanley, at the end of 2009 the RMB/USD rate will rise to 6.3, meaning RMB will appreciate by 7.7% in less than 14 months. Wang Qing also said there was no market condition for RMB depreciation, and believes RMB can hardly depreciate continuously.
But strong depreciation expectation for RMB occurred in the non-deliverable forward (NDF) market since China’s central bank announced an interest rate cut in September. In late September RMB’s five-year NDF approached 7.0, while one-year and two-year RMB NDF both fell to less than 7.0 in October. Depreciation expectation is strengthening.
Ha Jiming says that with the global financial crisis, the Chinese economy is declining, and more obvious decline will appear in exports next year. Since the decrease of export orders has lagged behind the economic decline, it seems exports are now dropping drastically, but this may accelerate next year. Besides, hot money inflows won’t be so active in future as they have been, and overseas companies will withdraw funds and profits from China due to the global credit crunch. With these factors, RMB will depreciate against the USD.