MNI Interview: Volatile Yuan Ahead As Uncertainty Dominates

The yuan will experience swings in 2024 as it grapples with several domestic and international factors, such as the ability of China’s support policies to boost sentiment, potential Federal Reserve interest-rate cuts and the performance of the U.S. economy, a prominent economist told MNI in an interview.

Guan Tao, global chief economist at BOC International, said a Fed pivot would create a benign environment for a stronger yuan, however, stable upward momentum will require Chinese consumption and investment expectations to improve. He added predictions of sharp, one-way yuan appreciationwere too optimistic.

The U.S. dollar index will trade circa 100 in 2024, compared with last year’s 107 peak and 2022’s 115, 10-year high, as the euro weakens and the Japanese yen rises, Guan predicted. U.S. and European companies will restock should the American economy achieve its ‘soft landing,’ benefiting Chinese exports, which should outpace the global average growth rate and improve the trade surplus, Guan noted. He added capital outflow will reduce should the interest-rate differential between China and the U.S narrow, lowering the capital account deficit. (See MNI: Yuan To Rally On PBOC Support, Exporter Demand-Advisor)

FISCAL SPENDING

Domestic fundamentals remain the decisive factor driving CNY momentum this year, Guan stressed. According to BOCI, GDP growth in 2024 will likely reach 4.8% y/y, compared with the widely-expected 5% area.

The private sector’s weak expectations and the impact on soft domestic demand among consumers and investors – dragging down inflation – will hamper the economic recovery, Guan added.

“Weak inflation reflects the oversupply in certain industries and high real funding costs, pointing to a cold scenario for the economy,” he warned. “Low inflation creates more room for policy easing, but it also reduces the effectiveness of policy efforts.”

Fiscal authorities must increase spending as the private sector tries to repair balance sheets, while the central bank will find it difficult to bolster the economy via monetary policy as debt becomes less attractive, he added. Better coordination between monetary, fiscal and industrial supports was needed, he noted.

Guan called on authorities to announce more concrete fiscal measures at a fast pace, such as a higher deficit/GDP ratio in March to bolster confidence. Gradual and moderate easing will reduce policy effectiveness, he cautioned.

In addition, fiscal investment must shift from traditional infrastructure projects to public services, including education, medical treatment and pensions to reflect the better return on social welfare programmes, Guan suggested.

PBOC STANCE

Guan expects the central bank to keep its fx policy flexible and take necessary actions to curb any one-way CNY move.

Yuan daily fixing, an indicator of the PBOC’s fx stance, has deviated greatly from investor estimates since last August, with the widest gap reaching a record of 1517pips on Nov 1. However, the gap has narrowed further since Nov 20 as the USD weakened, while the fixing’s volatility increased. This was a marked difference from October’s more solid reads, which fuelled long CNY trades, Guan continued.

The lower differential between yuan fixing, CNY and offshore yuan (CNH) decreased the currency’s depreciation expectations, and pointed to steady pricing alongside increased onshore interbank fx trading volume, which jumped by 73.7% m/m in November.

The PBOC’s moves to shore up the yuan in 2023 were aimed at correcting the supply and demand distortion in the fx market rather than safeguarding a certain level, Guan explained.

According to the State Administration of Foreign Exchange, bank clients have turned to net purchases of USD since July, reaching USD30.6 billion that month – the biggest net purchase since February 2017 – compared to a net sale in May and June.

This drove the PBOC to act, Guan said.