China economy

Goldman Sachs economists warn China's yuan trading likely to become more volatile

  • Reducing reliance on the US dollar could avoid vulnerability Russia has faced with American sanctions on its companies
  • Convergence between the offshore traded CNH and the onshore traded CNY argued as likely
PUBLISHED : Monday, 17 December, 2018, 1:39pm
UPDATED : Monday, 17 December, 2018, 6:12pm

China’s exchange rate is likely to become more volatile in time as the country pushes greater international use of the yuan, according to Goldman Sachs.

While the yuan internationalisation campaign hit a setback as China tightened regulation of capital flows in the wake of a messy 2015 devaluation, there is increasing pressure for policymakers to take up the initiative again, economists including senior China economist MK Tang wrote in a note on Monday.

China’s current account will tip into deficit in coming years, in the view of many strategists, as its increasingly large economy continues to grow faster than the rest of the world.

In financing that deficit, China could reduce risks if it acquired funding in its own currency – much like the United States does now, and unlike more vulnerable countries such as Brazil, Goldman noted.

By reducing reliance on the US dollar, China could also avoid the kind of vulnerability Russia has faced with US sanctions on its companies, it said.

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“After a brief hiatus in the last couple of years, global promotion of the [renminbi] will likely be supported with a greater sense of urgency,” the team wrote in reference to renminbi, an official name for China’s currency.

One occurrence that is likely to come is a convergence between the yuan traded offshore, known as CNH, and that traded onshore, known as CNY, the economists argued.

Their analysis of discrepancies between the two suggested that yuan volatility would be “much closer to that of other major currencies” once exchange-rate controls were eased.

“A truly global currency is one whose worth should be essentially indifferent to country boundaries,” the Goldman economists wrote.

“Should CNY’s fluctuations one day indeed become as large as those of other major currencies, it may also significantly push up the volatility of the other Asian” emerging-market currencies, they added.

Up to now, Asian exchange rates have tended to fluctuate less than other emerging nation currencies, possibly because the yuan has played an “anchor” role, Goldman said.