Banks slash renminbi forecasts as China's economy reels from Covid-19

While China's central bank and policymakers have pledged to step up support, markets are tumbling. PHOTO: REUTERS

BEIJING (BLOOMBERG) - The renminbi's sudden slide looks set to gather pace over the next few months as markets price in a worsening outcome for the Covid-19-stricken economy.

Analysts from Credit Agricole, Standard Chartered Bank, BNP Paribas and HSBC have slashed their forecasts as the renminbi plunged more than 3 per cent this month. A separate survey of 11 traders and analysts by Bloomberg shows that the currency is expected to drop to 6.7 per United States dollar in three months, about 2 per cent weaker than current levels.

The turnaround, just months after China sought to tame renminbi strength, comes as Covid-19 lockdowns fan fears that the nation will miss its economic target with even the capital Beijing battling an outbreak. While the central bank and policymakers have pledged to step up support, Chinese markets are tumbling, raising the spectre of accelerating capital outflows.

"I don't think this is an end to recent yuan depreciation," said Mr Bo Zhuang, senior sovereign analyst at Loomis Sayles Investments Asia in Singapore, who raised concerns of a possible hard landing should a lockdown grip Beijing. He forecasts the renminbi weakening to 6.85 per US dollar this year, with a potential to hit seven next year.

Morgan Stanley and other banks have cut their China growth forecasts to below the official projection of 5.5 per cent for the year. Early indicators compiled by Bloomberg show domestic demand worsened in April while business confidence also plunged.

Onshore renminbi has dropped almost 1 per cent this week to 6.5571 a dollar on Wednesday, while the offshore renminbi fell about 1 per cent over the same period to 6.5897.

HSBC and BNP Paribas now see the renminbi falling to 6.60 per dollar by the end of June, while StanChart and Credit Agricole forecast it at 6.70. Bank of America and TD Securities see the currency falling to 6.80 by year end on worsening terms of trade. At the end of March, analysts surveyed by Bloomberg expected the currency to be at around 6.38 by the end of the second quarter.

"The yuan's outlook is heavily dependent on the evolving Covid-19 and growth situation in China," said Mr Alvin Tan, head of Asia currency strategy at the Royal Bank of Canada in Hong Kong, "It makes sense to use controlled currency depreciation as a relief valve for the economy if growth risks were to escalate."

The People's Bank of China's (PBOC) measured approach towards supporting the renminbi is also evident from its restraint in using the daily reference rate as a signalling tool. The fixing in recent sessions has been broadly in line with estimates. On Monday, (April 25), the central bank cut the amount of money that banks need to have in reserve for foreign currency holdings to increase renminbi liquidity.

"I prefer to view the PBOC moves as managing exchange rate volatility rather than targeting an exchange rate level or view them as attempts to reverse a trend," said Mr Philip Wee, senior foreign exchange strategist at DBS Bank in Singapore

The PBOC has various tools at its disposal to boost the renminbi. It could use currency fixing, squeeze offshore renminbi shorting costs and further cut the reserve requirement for foreign currencies, according to the Bloomberg survey participants.

The central bank could also limit foreign outflows and foreign currency purchases onshore, said the traders and analysts, who asked not to be identified as they are not authorised to speak publicly.

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