- Renminbi weakness is being fuelled by growing household demand for foreign exchange, a monthly FT Confidential Research survey indicates.
- Pressure is also coming from Chinese companies, who may hasten the speed with which they pay down offshore borrowings amid fresh global volatility.
- Post-Brexit uncertainty, combined with evidence of fresh economic fragility, strengthens the case for the government to maintain its pro-growth tilt. While this may aid short-term currency stabilisation, in the longer term it will only strengthen downward pressure on the exchange rate.
The renminbi has weakened against both the US dollar and the CFETS trade-weighted basket of currencies launched by the People’s Bank of China (PBoC) late last year. The currency has hit fresh multiyear lows in the wake of the UK’s shock vote to leave the EU, falling against both the dollar and the basket (see chart).
The PBoC blamed the renminbi’s weakness on a number of factors, including Brexit, Chinese overseas direct investment flows and companies continuing to pay down dollar borrowings, as well as uncertainty related to the US Federal Reserve’s plans.
We do not think the PBoC is telling the whole story and believe renminbi depreciation and economic weakness have triggered a fundamental shift in household expectations, leading to a structural increase in demand for foreign exchange.
Since January 2016, FT Confidential Research has been asking households about their appetite for foreign exchange and their potential demand were capital controls to be removed entirely. Our June results showed a notable rise in demand, even as speculation over a Fed rate hike has waxed and waned.
Household forex perceptions shift
The proportion of respondents saying they held no foreign exchange fell to 49.8 per cent in June from 53.8 per cent in January, while those saying they would not hold any, even if there were no capital controls, fell to just 28.1 per cent from 41.4 per cent. We see the 13.3 percentage point swing in favour of holding at least some foreign exchange as clear evidence of rising demand at the household level for non-renminbi assets (see chart).
A key narrative since the second quarter has been that renminbi depreciation reflects Chinese companies paying down their dollar borrowings. However, our consumer survey of foreign exchange demand, coupled with our monthly survey of consumer sentiment towards the economy, suggests a growing number of urban households are looking to shift some of their savings out of renminbi.
The government has been tightening capital controls — both indirectly and explicitly — since last August’s devaluation to deter outflows, and has been encouraging greater portfolio inflows. Fresh stimulus measures have also helped stabilise the economy and restore calm. These measures have had some impact: foreign exchange reserves rose $13.4bn in June, with exchange rate valuation changes dragging the headline down just $4.8bn, according to FTCR calculations.
On the other hand, our survey of foreign exchange dealers around the country concluded that moving money offshore is still possible, if more complicated. We do not think that capital controls will be able to staunch outflows in a period of renewed domestic market volatility.
Corporate angle still in play
The corporate debt dynamic is still in play. China’s overall external debt has fallen sharply since peaking at $1.67tn in the first quarter of 2015. Back then, short-term debt — with a duration of less than one year — accounted for 70.5 per cent of the total. By the end of the first quarter of this year, external debt had fallen to $1.36tn, while the proportion accounted for by short-term debt fell to 62 per cent.
Brexit has created uncertainty for global markets. This could hasten the pace at which companies pay off their foreign-denominated debt, meaning further renminbi depreciation (see chart).
The global financial uncertainty triggered by the UK’s shock vote strengthens the argument in government for its pro-growth tilt to continue. FTCR’s June indices suggest that the economic stabilisation caused by the first quarter resort to stimulus is fragile at best, and official and unofficial purchasing managers’ indices for June both support this view.
Despite the ongoing reverberations of the “authoritative person” and their harshly critical People’s Daily essay in early May, we believe the government will again err on the side of caution, maintain a pro-growth stance and go slow on reform. In the short term, this may include trying to manage a more stable exchange rate, but this will mean worsening imbalances over the longer term. Households have clearly taken notice.
|FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.|