Renminbi sticking to well trodden path
We noted in “Renminbi depreciation true to form” (6 June 2019) that history was repeating itself, with the Renminbi NEER having weakened in April-June as it had done in May-July 2018, albeit at a more modest pace (see figure 1). This was a clear indication in our view that “Chinese policy-makers were once again using Renminbi depreciation as both a weapon in the trade war with the US and a tool to reflate the Chinese economy”.
Moreover, we argued that the risk near-term was that the Renminbi would weaken further and between 6 June and late-August the Renminbi NEER depreciated 2.7% to a five-year low – a similar pace of depreciation as recorded between mid-July and mid-October 2018.
The Renminbi NEER was then range-bound between late-August and early-October before making incremental gains in the second week of October on news of a thawing in US-China relations and progress made in negotiations in “Phase 1” of a bilateral trade agreement.
The Renminbi NEER appreciated a further 0.7% in the first week of November to within touching distance of an 14-week high as markets focused on the prospect of the US cancelling tariffs on $156bn of Chinese imports planned for 15th December and removing the 15% tariff it imposed on 1st September on about $125bn of Chinese imports.
It is notable that this modest rally was similar in magnitude to the up-tick in the Renminbi following President Trump’s announcement on 1st December 2018 that the US would delay a planned increase in tariffs on $200bn of Chinese imports to 25% from 10%.
However, the lack of tangible progress in US-China trade negotiations in the past week has seen the Renminbi NEER flat-line – as it did in the weeks following the US announcement on tariffs in early December 2018.
History suggests that if US-China trade negotiations stall in coming weeks the Renminbi NEER will continue to tread water, with a growing risk of it depreciating as the 15th December deadline approaches – a risk exacerbated by signs that Chinese economic growth remained weak in October by historical standards.
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Olivier Desbarres is an economist, strategist and entrepreneur. He is Director and Founder of 4X Global Research. 4X Global Research was founded by OIivier Desbarres in 2017, and the firm provides both institutional and corporate clients with substantive research, high-quality analysis and insight on emerging and G20 economies and financial markets.