The quick answer is yes, a weaker CNY would help China’s economic growth, as this may boost exports. The more considered answer would probably be ‘yes, a weaker CNY may help China’s economic growth, but it depends on how the US and other countries/trading blocs react to this’. If trading partners take the view that China is trying to get an edge by devaluing the CNY then they may protest and take some actions to address this. There is also the fact that a weaker CNY would make imports (energy, some technology etc.) more expensive. The knock-on effects on industrial demand may be worth considering.
In general we at Tricio would join the traditional economists view that a nation cannot devalue its way to prosperity. This doesn’t mean that countries won’t try it of course! At our webinar on 27th July (contact us at info@tricio-advisors.com to register) we will discuss our views on China within the ‘Investing in a High Yield World’ theme, so please sign up if you are interested. This blog will stick to looking at the risk that Chinese authorities may take the view that the CNY depreciation from 6.3 to 7.15 since early 2022 is only part of the move. What about returning the CNY to the 8.3 area, last seen in 2005? Or, perhaps more pragmatically, 7.8 where the HKD peg to the USD mid-point lies?
The chart below shows USD/CNY (weekly). 2014 was the low point for the USD in this cycle, and a case for a push above the 7.3 area can be made if USD rates stay higher for longer and China is forced to provide more stimulus (lower rates) as their economy remains sluggish.
The chart below shows the JPY per CNY (weekly). It could be argued that Japan has benefitted from a weaker JPY since the pandemic, as the cross rate has shifted from Y15 to Y19.40 (with brief pushes above Y20.80 last year). A further depreciation of the CNY would only pull the cross rate back to the Y17 or slightly lower area.
The KRW/CNY (weekly) chart below shows a relatively flat range around KRW 175. If the CNY moved to 8 vs. the USD and USD/KRW remained steady the cross would dip to KRW 158, the lower end of the range in place over the last decade.
Worth noting is the EUR/CNY cross which (chart below, weekly) suggests that a turn above the CNY 8.3 area could see hedgers taking steps to address a weaker CNY trend. Back of envelope forecasts point to CNY 9.6 risk, taking our EUR/USD $1.2 target and the USD/CNY 8 risk.
These are all potential risk views of course. The Chinese government may well decide not to let the CNY come under further pressure. This is still a ‘dirty-float’ currency at best and there are many controls in place. But, on balance, the chart trends suggest that there is some risk coming into play that the CNY tumble vs. the USD and EUR may have further to go, a pullback vs. the JPY may be seen, and a test of the range low vs. the KRW could be in the offing.
Gerry Celaya
Chief Strategist