Offshore renminbi seen tumbling to new low against US dollar in China sell-off

NEW YORK – Global investors have little confidence that China will succeed in shoring up its financial markets, predicting that mounting economic stress will drive the renminbi’s offshore exchange rate to historic lows.

The renminbi traded internationally is seen depreciating to 7.6 per US dollar before the end of 2023, according to a median estimate by 455 respondents in the latest Bloomberg Markets Live Pulse survey.

That implies a drop of 4 per cent from the current level of 7.29, and would be a record low for the currency.

Underlining the country’s bearish outlook, just 19 per cent of survey participants plan to increase their China exposure over the next 12 months, while 24 per cent plan to reduce their holdings. That is a shift from March, when 25 per cent of investors said they would boost exposure.

In recent days, Beijing has intensified efforts to halt a rout in the nation’s assets. The authorities urged financial institutions to buy stocks and the renminbi, made it more expensive to short the offshore renminbi through higher funding costs, and told mutual funds to stop selling equities. 

While these efforts briefly lifted markets, foreign funds have continued to sell at a record pace amid concern over China’s struggles with falling prices, a slumping property market and soaring local government debt. Wall Street analysts are also turning more downbeat, with Morgan Stanley and Goldman Sachs Group lowering their targets on Chinese stocks in the past week.

China’s easier monetary policy at a time when the rest of the world is tightening is adding pressure on the renminbi, as investors turn to higher-yielding United States assets.

Two-year US Treasuries yield almost 3 percentage points more than the Chinese equivalent, the biggest premium since 2006. 

The central bank’s “policy response to support the yuan hasn’t been effective in changing the trend and won’t be”, said Mr Kiyong Seong, a strategist at Societe Generale in Hong Kong. 

Unlike in 2008, when China unleashed massive spending programmes to bolster growth, few expect the country to launch large-scale measures this time round to save the economy.

Only 11 per cent of the Markets Live Pulse respondents expect policymakers to unveil “bazooka-like” stimulus, with the majority predicting moderate measures targeting specific industries. Another 32 per cent said any policy rescue will be too little, too late. 

While the authorities have issued plenty of rhetoric in support of the economy, specific action has been limited. During his presidency, Mr Xi Jinping has sought to end the reckless debt-fuelled expansion that typified the years in the wake of the 2008 stimulus blitz and fuelled heady economic growth. 

“Things are coming,” said Mr David Loevinger, a managing director at TCW Group, on the stimulus. “But it seems like there’s an internal debate about what you need to do in the short term without losing sight of your long-term policy objectives.” 

While US President Joe Biden labelled China’s economic woes a “ticking time bomb” for the world and Treasury Secretary Janet Yellen called them a “risk factor” for the United States, investors see limited spillover risk right now. 

About 31 per cent of the survey respondents said the MSCI China Index would need to drop another 20 per cent in the next month to trigger a global rout, while another 33 per cent said Chinese equity losses will not lead to any significant contagion.

Similarly, a majority of market participants – 56 per cent of respondents – said China’s slowdown will not have a significant impact on actions by other key central banks such as the Federal Reserve.

Because major economies have limited export and banking exposure to China, “a debt-induced economic downturn in China likely would not trigger another global financial crisis a la 2008”, wrote Wells Fargo & Co economists, including Mr Jay Bryson, in a note. BLOOMBERG