China Watchers Split on Yuan Outlook; It Comes Down to Trade

(Bloomberg) -- After missing this year’s slump in the yuan, forecasters for the Chinese currency are split on the outlook in 2019, thanks largely to the sharply divergent outcomes from U.S.-China trade talks.

Since the yuan’s four-year run of appreciation against the dollar ended in 2013, it has been tough to predict, thanks to shifting prospects for China’s economy as it decelerated and to sometimes unexpected policy moves by the country’s opaque leadership. This year, the largely flat outcome that analysts had expected was upended by President Donald Trump’s move to start a trade war between the world’s two largest economies.

“It depends pretty much on the trade conflict," Stefan Grosse, an economist at Nord LB in Hanover, Germany, said of the yuan’s outlook for 2019. The currency could rise to 6.8 if an agreement is reached, or swiftly slide past 7 if not, he said. “Honestly, I am more pessimistic due to the erratic nature of the U.S. president. But I love to be proven wrong.”

The most optimistic forecaster sees the yuan climbing next year to 6.25 per dollar, while the biggest bear expects a slide to as weak as 7.4, according to a Bloomberg survey of 22 analysts and traders. It was at 6.8955 in Shanghai Wednesday afternoon -- weaker than all but four of 43 projections as of a year ago for its end-2018 level.

China Watchers Split on Yuan Outlook; It Comes Down to Trade

Eight yuan watchers project a decline beyond the 7 psychological mark by the end of June, compared with 11 in a similar survey conducted two months ago. Goldman Sachs Group Inc. analysts concluded it’s likely to stay the stronger side of 7 as long as trade talks are under way.

The Chinese currency has tumbled 5.6 percent in 2018 -- making it one of the worst performers in Asia, though analysts had expected the exchange rate to remain largely flat this year. In 2017, the yuan posted the biggest annual advance in nine years, while market watchers had foreseen a slide beyond 7.

The median estimates are for the yuan to trade at 6.92 at the end of the first quarter, and at 6.78 at the end of 2019. The survey was taken Dec. 12 to Dec. 17.

Bloomberg’s survey involved 11 strategists, economists and researchers at financial institutions, five currency traders at onshore banks, and six finance executives at Chinese companies. Survey respondents who agreed to be identified were from Australia & New Zealand Banking Group Ltd., United Overseas Bank, Chinese Academy of Social Sciences, Nord LB, China Merchants Securities, Banco Bilbao Vizcaya Argentaria SA, CEB International Investment Corp, Bank of Communications, Svenska Handelsbanken AB.

The following are select outlooks from survey participants:

China Academy of Social Sciences (Zhang Ming, economist)

  • End-March forecast is 7, with yuan seen at 7.3-7.4 by year-end.
  • China’s economy will face strong slowing pressures in the first quarter, with trade frictions continuing to hurt sentiment.

China Merchants Securities Co. (Lin Shu, analyst)

  • End-March prediction is 7.2 and end-2019 is 6.25.
  • China and the U.S. won’t reach a final trade deal by the end of the current 90-day negotiation period.
  • In time, the dollar will weaken, driving the yuan stronger, as European and Japanese central banks tighten monetary policy.

United Overseas Bank (Koon How Heng, head of markets strategy)

  • End-March call is 6.95 and end-2019 is 7.1.
  • “Gradual, controlled” depreciation will continue as China’s growth weakens further.
  • U.S.-China trade talks will need lengthy negotiations and may stretch beyond 2019.

Banco Bilbao Vizcaya Argentaria SA (Xia Le, economist)

  • End-March forecast is 6.8 and end-2019 is 6.7.
  • China and the U.S. will reach a deal by the end of the current 90-day period for talks.
  • The People’s Bank of China has plenty of tools to manage the exchange rate, so the possibility of the yuan falling below 7 isn’t high in the short term.
  • China will announce more opening-up policies within the next three months.

Svenska Handelsbanken (Bjarke Roed-Frederiksen, senior economist)

  • End-March forecast is 6.9 and end-2019 is 6.6.
  • The PBOC won’t let the yuan weaken past 7, as a breach could spur expectations for further depreciation, which may in turn lead to “massive” capital outflows.
  • China will keep the currency stable on a trade-weighted basis.

©2018 Bloomberg L.P.