According to the Research Department at BBVA, argue that the recent depreciation of the Chinese renminbi (RMB), albeit pushed USD/CNY above the psychological level of 7, is unlikely to lead to financial turmoil like what happened in four years ago.
“The recent sharp depreciation of the RMB is unlikely to lead to financial turmoil like in 2015: the authorities kept the currency’s pricing mechanism intact and have accumulated valuable experience over the past few years; moreover, the PBoC still maintain a tight grip of the country’s capital account.”
“We believe that the current depreciation of the RMB won’t repeat the history of the currency devaluation in 2015 to plunge the country’s financial system into turmoil. For the moment, China’s authorities have no intention to initiate a bout of deep depreciation. That being said, the prospect of China-US trade talks will dictate the evolution of the RMB exchange rate in the short term.”
“We define two scenarios for the RMB exchange rate at end-2019: in the first scenario, if China-US trade war maintains the current situation, particularly, 10% tariff on the USD 300 billion goods without further escalation, the RMB exchange rate is expected to fluctuate around the level of 7.15 at end of this year; in the second scenario, the RMB exchange rate could further plunged to 7.4-7.5 if both sides further escalate the trade war in the second half of the year, such as to raise the tariff to 25% for all the Chinese exports to the US.”