The considerable downside risks the Chinese growth outlook and the uncertainty due to trade conflict imply that the Chinese renminbi might remain under depreciation pressure against the U.S. dollar, noted Commerzbank in a research report. This view is further underpinned by the fact that the monetary policy might continue to be geared to ensuring a supportive liquidity environment. However, financial market stability continues to be the top priority for the Chinese authorities.
“We fear that especially in the current uncertain environment, it may seem particularly attractive for Chinese investors to invest their money abroad. This would open the door to capital flight if such foreign investments were made even more attractive by the expectation of a significant further CNY depreciation”, said Commerzbank.
Chinese government is believed to have learned its lessons after the capital flight in 2015 and might like to avoid a similar experience in any case. Accordingly, the PBoC might not oppose a further depreciation of the renminbi, but will possibly try to dampen excessive depreciation moves at an early stage. The PBoC continues to fix CNY much stronger than the market moves would justify.
“We therefore do not assume that the Chinese government will use the renminbi as a weapon in the trade war and will not try to compensate for the effect of US punitive tariffs by massively devaluing the renminbi. We therefore expect the renminbi to continue to depreciate moderately - as long as the trade conflict is not completely unexpectedly resolved”, added Commerzbank.