Is the current level of RMB appreciation sustainable?

HONG KONG – BBVA says the RMB’s strong performance in recent months has surprised the market, but is caused by a confluence of factors - a steep deprecation of US dollar against other major currencies; stronger-than-expected growth momentum in China; and effective implementation of a series of measures aiming to “promote capital inflows and limit outflows”.

“The on-going RMB appreciation could provide a time window for Chinese authorities to unveil more measures to improve the existing exchange rate policy,” BBVA says.

“Nevertheless, they are unlikely to give full flexibility to the RMB exchange rate before a number of domestic financial vulnerabilities have been addressed successfully.”

BBVA says that despite the recent appreciation, it is projecting the CNY/USD exchange rate to fall to a level 6.85-6.9 at end- 2017, equivalent to 2-3% depreciation from the current level, mainly due to prospective adjustment of the USD and moderation in China’s economy.

“Overall, we predict more volatile two-way movements of the RMB in the remainder of the year,” BBVA says.

Notwithstanding China’s stepped-up efforts to cool the property market and to curb shadow banking activities, growth in Q1 and Q2 rebounded to 6.9% y/y, it adds.

“Now, it is increasingly likely that this year’s growth could surpass the official target of 6.5%. Moreover, boosted by the campaign of eliminating over-capacity, upstream industries led the profit rise for corporate sector.

“ In the first half of the year, the growth rate of industrial enterprise profit amounted to 22%, which is very helpful for firms to repair their balance sheets and has largely reduced the tail risk to the macro economy.

“Last but not least, Chinese authorities have implemented a series of initiatives to “promote capital inflows and limit outflows” this year, while measures of the last year continued their effects, which enabled them to have a tighter grip of exchange rate stability.”  www.bbvareserch.com (ATI).