RMB likely to face depreciation pressures, says S&P

June 26, 2019

SINGAPORE - China is likely to tolerate greater renminbi flexibility if the currency faces depreciation pressures due to ongoing US-China trade tensions, S&P Global Ratings said today. The renminbi may face depreciation pressures for two reasons, S&P says.

"First, China is losing competitiveness as a result of higher U.S. tariffs on its exports. Second, over the long run, slower technology transfer resulting from US-China friction could erode China's productivity advantage over its trading partners.

"This would also weigh on the renminbi's valuation."  

S&P Global Ratings does not believe that China is intervening to weaken the currency.

If anything, the central bank has been "leaning against the wind" to slow the pace of renminbi depreciation and has managed to keep the currency fairly stable on a trade-weighted basis, it says.

"Preventing the renminbi from moving with fundamentals may be a short-term palliative.

"But this can impose heavy costs including an overvalued exchange rate that weighs on exports, and capital controls that can cause distortions in the financial system."

Shaun Roache, S&P Global Ratings' Asia-Pacific chief economist, said: "The economic costs of tightly managing the currency are substantial especially when the fundamentals are changing.

"We think that the economics will trump the politics of the exchange rate, and that China will tolerate renminbi flexibility versus the US dollar.

"While the politics remains highly unpredictable, if U.S.-China tensions persist or worsen this year, it would mean the exchange rate weakening beyond 7."

This could mean weaker currencies across Asia-Pacific due to an emerging "RMB bloc", S&P says. "The renminbi's influence has risen, particularly since 2015, across many economies, emerging and developed."

Roache said: "The policy easing signalled by our financial conditions index suggests China's economy is on track to meet our 6.2% growth forecast for 2019.  

"While we do not expect any further substantial stimulus unless momentum turns negative, the cumulative easing underway is piling up." www.standardandpoors.com (ATI).