With US rate hikes, tweaks to the China Foreign Exchange Trade System basket, and worries about the property market, the RMB had a rough 2016. Support from the People’s Bank of China meant that things were looking up as trading began in 2017, but so far there is little room for optimism.
At closing on Tuesday, the onshore RMB traded at 6.94 to the USD, touching an eight year low, falling further on Wednesday. Optimism in US markets and rate hikes are the obvious culprit, but some are predicting that this volatility could be a sign of things to come. In January of 2016, one USD could buy 6.5 RMB, but some analysts are wondering if 7.5 or even 8 or 9 could be a new normal.
The strangest day for China’s 2016 was in early December, when the RMB shot from 6.8 to 7.5, and then quickly rebounded. Foreign Policy pointed out that this was the cheapest level since the financial crisis of 2008 to 2009 which some thought was due to a tweet from President-elect Donald Trump—but ultimately due to a computer glitch. However, drops to the 7.5 range for 2017 are expected, if UBS Securities are to be believed; they told Caixin Media in November to expect 7.5 or lower.
Albert Edwards of the French Société Générale, back in October when the RMB was trading at a reasonably healthy 6.7, said that it could fall to 9.1 in 2017, a claim made against the probability of China’s property bubble bursting.
However, while some are quick to point the finger at China’s precarious property bubble or a potential slowdown in the GDP to 6.4 in 2017, US economic optimism is the most likely driving force. “In 2017, as the Fed has resumed its rate increase cycle and Trump’s win has brought upbeat sentiment towards the US economy, we expect the depreciation pressure on RMB against USD to continue, and the USD/CNY exchange rate could cross the psychological level of 7 during the first quarter of 2017,” Lynn Song and Yao Wang, analysts for China Merchants Securities, told SCMP on Wednesday.
Of course, there may be no need for all this doomsaying. Despite a less than stellar start to 2017, late Wednesday night state support drove the currency back to strength and away from the 7 mark. “The weaker dollar overnight should help push the yuan further away from the 7 level for now, aiding the Chinese authorities’ recent efforts to stabilize the currency,” Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd., told Bloomberg.
The currency volatility comes amid very strict rules on foreign exchanges, hitting both companies and private individuals alike. Getting yuan out of China has become increasingly difficult in recent months, with new regulations coming into force in 2017 likely to make it even harder.
Cover image from Orange News