A man carrying a bag of groceries walks past a mural depicting an iconic financial market bull statue, near the central business district in Beijing, on April 18. Photo: AP
by Neal Kimberley
by Neal Kimberley

Can renminbi bulls expect a reprieve any time soon?

  • Tighter US monetary policy is in the offing and should continue to provide general support for the dollar on foreign exchanges
  • China’s coronavirus-related lockdowns are a big headwind for the economy, justifying a weaker yuan from a currency market perspective
The pace of yuan depreciation may have been rapid in recent months but that does not mean the slide is over. Spoiler alert: renminbi bulls of a nervous disposition might wish to look away now – there’s every possibility that the yuan will weaken further against the US dollar.
No one in Hong Kong needs reminding that the US dollar is strong. Under the linked exchange rate system, the Hong Kong Monetary Authority (HKMA) acts to ensure the US dollar/Hong Kong dollar exchange rate stays within a band of 7.75-7.85. With investors presently seeking higher yields in the United States, the US/Hong Kong dollar exchange rate has tested the upper end of the permitted band.
Consequently, last week, for the first time in 18 months, the HKMA responded to Hong Kong dollar weakness and sold US dollars, in line with its linked exchange rate system obligations. The HKMA may find it has more to do.

While headline US consumer price inflation (CPI) may have eased to 8.3 per cent year on year in April, down from March’s 8.5 per cent and a first decline in the annualised data since August, the Federal Reserve will not be popping the champagne corks just yet.

In fact, the Fed would do well to keep the champagne firmly on ice. The US central bank still has plenty to do, as it attempts to curb rising inflation which it had for so long categorised as “transitory”.

That misstep has not bolstered the Fed’s reputation in the eyes of the markets, and credibility is everything for any central bank or monetary authority. With Fed chief Jerome Powell now having secured cross-party congressional approval for a second four-year term, the US central bank may take off the monetary kid gloves.

The Fed has the backing of US President Joe Biden, who said last week that tackling high inflation is “our top economic challenge right now” and that “the Fed should do its job and it will do its job … with that in mind.”
A woman shops at a grocery store in New York on May 12. Prices of food, clothing, fuel and cars have all risen in the US, despite historically low unemployment. Photo: Getty Images/AFP
Tighter US monetary policy is coming, and that should continue to provide general support for the US dollar on foreign exchanges, even if the prospect causes equity market and cryptocurrency jitters. Stablecoin woes won’t deter the Fed.
It’s also worth noting that when a country runs such a large goods trade deficit as the US, and demand for overseas manufactures is traditionally pretty inelastic, a stronger dollar is a useful disinflationary tool when the main policy aim is reining in upward CPI pressure.

That has particular relevance when it comes to the dollar’s value versus the yuan, given the healthy appetite of US consumers for goods imported from China. Washington may not admit it, but a stronger greenback could suit US policymakers.

But, of course, in the case of UD dollar-yuan exchange rate, that presupposes Chinese manufacturers are able to supply US consumers. That leads into the issue of pandemic-related supply-chain disruption and more broadly to why, from a currency market perspective, there are continuing and specific reasons for the yuan to stay weak.
The West may have decided that Covid-19 now has to be “lived with” but China continues with a dynamic zero-Covid approach and associated lockdowns.

How China’s zero-Covid policy is tipping the world into recession

Some people, such as World Health Organization chief Tedros Adhanom Ghebreyesus, who was previously supportive of China’s efforts to deal with the coronavirus, now feel that Beijing’s zero-Covid policies are unsustainable.

But what matters to markets is what Beijing thinks, and Chinese officials don’t seem inclined to change tack.

For as long as they continue, China’s coronavirus-related lockdowns are a big headwind for the national economy. Lockdowns hurt economic activity and don’t do anything for confidence, perhaps illustrated by the month-on-month slump in new bank lending in China in April, driven by a drop in demand for credit.


Beijing’s central business district deserted as government strengthens anti-Covid measures

Beijing’s central business district deserted as government strengthens anti-Covid measures

Spare a thought also for Chinese firms loaded with floating-rate US dollar-denominated debt. They now face higher dollar-denominated debt service costs while the weaker yuan buys fewer US dollars. It’s a double whammy.

Even worse, the lockdowns inevitably affect the very revenue generation needed for repayments of interest and principal on borrowed funds. This set of circumstances does nothing to make the yuan more appealing.

There are good reasons the US dollar is generally strong on the foreign exchanges at the moment and there are specific reasons the yuan itself is weak against the greenback. The pace of yuan weakening against the dollar has been rapid, but that doesn’t mean it’s over.

Neal Kimberley is a commentator on macroeconomics and financial markets