Not now, renminbi!


Given the drama surrounding sterling, one might be forgiven for thinking that this was an isolated issue. But although the UK has demonstrated an odd willingness to punch itself in the face in recent years, the pound is far from the only currency wilting against the dollar.

Earlier today, the Chinese renminbi touched the 7.25 per dollar mark, its weakest level since early 2008, before settling back to 7.1995 at pixel time. Here’s a chart showing the USD-CNY exchange rate this year.

© Refinitiv

And here is what that looks like over the past two decades. For a heavily-managed currency, the recent weakening trend is pretty stark.

© Refinitiv

So what does this mean? Well, China’s well-known, much-discussed and thoroughly-dissected economic and financial issues certainly aren’t helping. While all eyes are currently on the UK’s predicament, if this continues it could prove the trigger for another spasm of fear over China as well.

To us, this looks like yet another example of how the US dollar is smashing almost everything in sight. Here is what the greenback has done against its biggest counterparties this year.

© Bloomberg

The consequences could be far-reaching, as Barclays analysts said in a note on Wednesday afternoon:

. . . While this is not a ‘systemic crisis’ moment, it is a worrying sign for the global macro outlook. After all, China is the single most important trading economy in the world. If the CNY is on a path to sustained depreciation, that is big news for every other exporter; most other countries will have to follow to keep themselves competitive. And yet, many of these countries are already facing high inflation and the need to defend their currencies from further depreciation. As important, the overnight move might be a sign that the PBoC is now comfortable with further weakness. A few days ago, it seemed like the Chinese central bank was planning to push back against further USD strength. If China is now changing tack, there is considerable room to go. In some ways, the recent CNY weakness is just the currency playing catchup to the weakness in every other currency against the dollar. We estimate that if the CNY were to go back to Q1 2021 levels on the CFETs basket, it would need to depreciate to 7.5 against the USD.

The move to a weaker CNY might also hold clues to the Chinese approach on growth and the Zero-COVID policy. While expectations had built up that this policy would be relaxed after the National Congress in mid-October, we think an about-turn remains highly unlikely (China: What to watch for at the Party Congress, 28 Sep 2022). If we are correct, and with Western demand for Chinese exports slowing, it is natural for authorities to try to boost growth to the extent possible by weakening the currency. Market reaction so far seems to support this interpretation, including in markets outside China. For example, South Korea’s Kospi 200 index has now underperformed the Shanghai Shenzhen CSI 300 by almost 5% since Friday, even though Chinese stocks have also been falling in that period. The South Korean won is depreciating sharply overnight, even as the central bank plays down the need to open up dollar swap lines. Indian investors have remarked to us on the 4% appreciation of the INR against the CNY since mid-August — this even as USDINR approaches 82.

Chinese Golden Week is around the corner. We expect that authorities will try to squash any further disorderly moves going into this period and the October National People’s Congress. And, like we argued above, it is too soon to worry about systemic risk emanating from China. But if the CNY is truly on a path to further currency depreciation, which now seems very likely, it is more bad news for the rest of the world.

“More bad news”. Just what we need right now.

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