China: Will it create a new currency crisis? – Nordea Markets

According to Amy Yuan Zhuang, Nordea's Chief Asia Analyst, depreciation expectations still prevail in China, reflected by exporters waiting to convert their FX income back into yuan. 

Key Quotes

“China has just stepped out of the shadow of the “currency crisis” in 2015-16. At that time, devaluation expectations led to actual CNY depreciation, which fed into more devaluation expectations and more actual weakening. It resulted in capital outflows worth billions of dollars. The authorities only managed to stabilise the situation by shutting down the capital borders. For most of last year, China supported the yuan strengthening as a way of fending off depreciation expectations. Depreciation expectations still prevail in China, reflected by exporters waiting to convert their FX income back into yuan. Given this circumstance, it is unimaginable for the authorities to initiate devaluation, which could add to depreciation expectations and a repeat of 2015. The economic loss following large-scaled capital outflows and financial instability is much larger than that incurred by US tariffs.”

“Devaluating the currency might infuriate the US but it also gives Trump a valid excuse to brand China a currency manipulator. This is not in line with Xi’s self-image of a rational and responsible statesman.”

“Devaluation makes exports cheaper but also imports more expensive. Since still a large share of exports are produced using imported parts, a lower currency does not give a clear-cut win to China.”

“We expect the CNY to remain driven by market sentiment, ie the USD. Given our expectations of renewed USD weakness in the medium to long term, the CNY is likely to strengthen on that horizon.”