HSBC: Renminbi appreciation to slow in 2012
HSBC believes the weakening of China’s structural and cyclical forces suggests the likelihood of another year of strong renminbi appreciation has decreased, according to Asiamoney, a sister publication to Euromoney FX News.
According to a research note released by HSBC on April 11, the bank has readjusted its year-end forecast from a 3% pace of appreciation to a less than 2%. The bank expects the renminbi to reach 6.18 per US dollar by the end of 2012 after cyclical inflation over the course of the first quarter failed to meet market expectations and as the nation’s trade surplus gradually narrows. As of April 11, the USD/CNY was trading at 6.31. "We now expect minimal appreciation until mid-year, and for a stabilisation and recovery in Chinese growth combined with greater broad US dollar weakness to see some modest resumption of appreciation in the second half of the year," said Paul Mackel, head of Asian FX research at HSBC. "We reiterate that at the same time as expecting less appreciation from the renminbi in 2012, we also expect greater two-way flexibility and volatility, as well as faster liberalisation."
Liberalisation moves in recent weeks show a mixture of relaxation of both inflows and outflows, and through both US dollar and renminbi channels. This creates improved two-way flexibility of the Chinese currency and reduces volatility.
On April 3, the China Securities Regulatory Commission (CSRC) announced that it would substantially expand quotas for both US dollar and renminbi qualified foreign institutional investor schemes (QFII) from US$30 billion to US$80 billion and from RMB20 billion (US$3.2 billion) to RMB50 billion respectively.
"This better equilibrium means that any lingering structural appreciation pressure will be even weaker and, against a backdrop where the cyclical numbers are even weaker, will work against currency appreciation in the near term," added Mackel.
On a separate note, the trade balance in for the first quarter of the year recorded a small surplus at US$660 million, compared to a surplus of US$48 billion in fourth quarter of 2011. As a result, net exports will likely become a drag on gross domestic product (GDP) growth in the first quarter, with its contribution to be in negative territory, says HSBC.
"For the renminbi, volatility in China's monthly trade balance will likely trigger further reform in renminbi exchange rate to better reflect the demand of a higher flexibility and volatility in the currency," said Xiaoping Ma, China economist at HSBC in a research note released on April 10.
March consumer price index (CPI) rose to 3.6% year-or-year on food, up slightly from February’s 3.2% and ahead of market expectations of 3.4%. The rise was primarily caused by a rebound in food prices, especially fresh vegetable which HSBC sees as temporary.
"Given fast drop in producer’s price index and slowing aggregate demand, we expect headline CPI to moderate in the coming months," said Mackel.
The ongoing downside growth risks will prompt further easing including at least 100 basis points of further reserve ratio requirement (RRR) cuts to counteract the slowdown, says HSBC.