Offshore yuan (CNH) at risk as PBoC pulls punches
13:30, 20 April 2022
Despite a slowing economy, the People’s Bank of China (PBoC) stopped short of cutting the loan prime rates (LPRs) on Wednesday, indicating that there may not be as quick a recovery as seen in the aftermath of the Covid-19 outbreak in 2020.
For the offshore yuan (CNH), the only way forward appears to be down as the strength it briefly witnessed in early March seems to have well and truly fizzled out.
On Monday, the dollar rose sharply against the yuan (USD/CNH) by 0.46% to 6.44; experts are seeing a further downside for the Chinese currency ahead.
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Further slide expected
“Growing evidence of slowing economic growth in China suggests to us that government bond yields there will continue to fall, and that the yuan will – eventually – follow suit,” Jonathan Petersen, emerging markets economist at Capital Economics, said in a note.
“We don’t think the yuan will necessarily weaken as much as the yen, not least given the PBoC’s aversion to large and uncontrolled market shifts. But we do think the growing yield gap will push it down before too long; we forecast it will reach CNH6.70 per US dollar by the end of the year,” he added.
Speaking specifically about the PBoC’s decision, Petersen’s Capital Economics colleague, Julian Evans-Pritchard, senior China economist, said: “The reluctance to embrace more wholesale easing suggests we shouldn’t expect a strong stimulus-led rebound of the kind we saw in 2020.”
Monetary policy stimulus to be muted
Similarly, Iris Pang, chief economist, Greater China at Dutch bank ING, expects monetary policy stimulus to remain muted.
Pang said in a note: “Our view is that the PBoC thinks liquidity is enough in the market to overcome difficulties during this lockdown. It could just be that banks are reluctant to lend.
“In this case, further extensive PBoC pressure will be required for banks to tap the standing lending facility [SLF] if banks do not get enough liquidity through open-market operations. As monetary policy is unlikely to be the main relief measure, we expect there will be more fiscal support for the economy.
“This includes faster issuance of local government special bonds to fund infrastructure investments, which should provide some job opportunities for the construction industry, as well as GDP [gross domestic product] growth support,” she added.
Economic growth to slow in 2022
Meanwhile, the PBoC appears to be of the view that a weaker currency will be a boost to the economy. On Wednesday, it set the US dollar–onshore yuan (CNY) rate at 100 basis points (bps) higher than market expectations.
For now, all bets seem to be against China’s economy recovering quickly after the recent Covid-19 shock.
On Tuesday, the International Monetary Fund’s World Economic Outlook also cut China’s economic growth projections to 4.4%, lower than an earlier estimate of 4.8%. China itself expects to grow by 5.5% in 2022.
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