All that gradual exchange flexibility, and yet the renminbi is only weakening:
Those charts are from HSBC’s currency team who observe that since the start of May the CNY has weakened by over 1 per cent versus the dollar — the equivalent of the largest fall over a 20-day period since the USD-CNY exchange rate was liberalised in June 2010.
Conclusion? The CNY may not be as immune to external developments as it was through 2011.
And it’s worth looking at the fix.
As HSBC notes, whereas previously the fix would drag USD-CNY lower (appreciating the CNY versus the dollar), now the fix is seemingly having a weakening effect:
Which brings us to China’s little outflow problem and plateauing reserve situation:
On top of this, the balance of flows is also much less supportive of consistent CNY appreciation. This view has been emerging since last year. The metrics we track to show overall flow pressures on the economy suggest that since late 2011, China has faced the strongest outflow pressures for some time.
With the economic outlook deteriorating, and expectations for currency appreciation having declined notably in recent months, the one-way pressure we previously saw for a lower USD-CNY has faded. This has also shown up in there being less reserve accumulation in recent quarters, with the Q1 rise in reserves largely due to accounting methods, rather than PBoC actively buying USDs.
And the key point:
If such outflows were to continue or even pick up pace, then USD-CNY would be at risk of moving even higher.
It’s also worth highlighting that the last time China experienced such sharp outflows was at the peak of the 2008 global financial crisis.
Unsurprisingly HSBC now presents something of an about turn on its RMB outlook:
Recent RMB weakness stands out compared with previous episodes. The weakness has been larger and has happened at a faster pace.
Importantly, this demonstrates how the RMB is not immune to stresses emanating from the Eurozone, and also that the currency appears to be more market driven than previously. But this supports our thinking about how the RMB is slowly becoming more flexible, and that the oneway appreciation view of the RMB, that many in the market have held for some time, should be increasingly losing ground. The direction for USD-RMB should be considered more uncertain if it is naturally becoming more flexible and slowly influenced by broader market forces.
Conclusion: China won’t be rescuing anyone (apart from itself perhaps) anytime soon.