USD/CNY: Yuan to slow its appreciation as the Chinese growth cycle cools down – CE

Economists at Capital Economics expect China’s economy to slow later this year even as growth picks up rapidly elsewhere. This backdrop has three implications for China’s financial markets.

Key quotes

“China’s government bond yields could fall this year and next, even if yields elsewhere stabilise or rise a bit more. While we expect some tightening of monetary policy in China in the near-term, we suspect that this is already priced in, and as growth slows investors will begin looking ahead to the next easing cycle. Meanwhile, we expect foreign purchases of China’s government bonds to remain strong, boosted later this year by their addition to another global benchmark index. All of this, we expect, will be sufficient to offset any upward pressure from rising yields elsewhere.”

“We expect China’s stock market to underperform. Many of China’s listed companies, particularly in the technology sectors, received boosts to their earnings from pandemic-related export demand, helping the market to a world-beating performance last year. This began to unwind towards the end of the year as the prospect of effective vaccines suggested a faster return to normal work and consumption patterns; as the global recovery gets further underway we expect this to continue. And if we are right that China’s economy will slow, domestically sourced earnings may slow as well.”

“We think the appreciation of the renminbi against the dollar will slow, and that it will underperform many other emerging market (EM) currencies. The yield gap has already moved in favour of less appreciation of the renminbi, and by the end of the year we expect the other two factors to follow suit. On balance, we still expect them to point towards some further appreciation. But we suspect the renminbi will appreciate at a much slower pace than it has, in general, since the mid-2020.”