China’s currency looks vulnerable as policymakers adopt a ‘growth at all costs’ strategy

Monetary stimulus. VCG/VCG via Getty Images

Chinese economic data continued to point to an economy that is quickly losing momentum, increasing the odds of further monetary stimulus in the coming weeks, according to Sue Trinh, RBC Capital Markets Head of Asia FX Strategy.

“Fixed asset investment growth is being supported for now by government spending, there is notable front loading of exports supporting industrial production growth but credit and lending data earlier this week were exceptionally weak and a drop in retail sales growth toward all-time lows bears monitoring,” she says.

Given the deceleration in the economy, Trinh says Chinese policymakers have refocused on a “growth at all costs strategy”, reflected in the chart below showing the huge blowout in the size of the central government deficit this year.


“Central government expenditure increased by 8.2% in the year to October and revenue growth shrunk 3.1% over the same period,” she says.

“This blowout in the deficit is reflected in the pick-up in fixed-asset investment growth from 5.4% year-on-year to 5.7% in October.

“The very small dividend to date from kitchen sink stimulus underscores the urgent need for structural reform.”

Given recent form from policymakers, Trinh says further monetary stimulus, including reserve requirement ratio (RRR) cuts for banks, is “expected in the coming weeks”, an outcome she says should place “renewed downward pressure on the Chinese yuan”.

Weakness in the Chinese yuan has weighed on broader financial markets this year, raising concern about the health of the Chinese economy. In particular, whenever the USD/CNY — or onshore-traded yuan — has approached the 7.0000 level, it has often led to a deterioration in investor sentiment.

It currently trades at 6.9500, having hit the weakest level in over a decade in late October.

Given Trinh’s view, a similar bout of risk aversion could eventuate from renewed weakness in the yuan.

However, she doesn’t expect that will occur in the near-term.

“USD/CNY will likely stay rangebound into the G20 meetings at the end of the month and a widely anticipated meeting between Xi and Trump,” she says.

“Expectations are running high in the past few days thanks to comments from trade doves Mnuchin and Kudlow, which we think is misguided.

“We recommend discounting commentary from these players and reiterate that the only people the market should pay attention to are Navarro, Lighthizer, Pence and, to an extent, Trump himself.”