SocGen Boosts Yuan Call as China Counters Depreciation Pressures

(Bloomberg) -- China will be able to counter much of the depreciation pressure weighing on the yuan this year, and the currency is set to drop less than previously expected, according to Societe Generale SA.

The French bank sees the yuan falling to 7.05 per dollar by year-end. While that’s down almost 10 percent from the level around 6.76 as of 2:20 p.m. in Shanghai Wednesday, it’s still appreciably stronger than the previous forecast of 7.20. The median estimate of more than 60 forecasters surveyed by Bloomberg is 6.80 for the end of December.

“There is a greater chance of the renminbi being stronger than our estimate, rather than weaker,” SocGen analysts Wei Yao and Jason Daw wrote in a report Tuesday, using another term for China’s currency. “Policy makers are keen to avoid another negative feedback loop developing like the one in 2015-16.”

Monetary stimulus, slowing growth and a diminishing current-account surplus will all put pressure on the yuan, according to SocGen, which sees bond yields dropping further in China this year. At the same time, China’s expanding presence in global securities indexes should boost foreign fund inflows and continued controls on outflows should help limit yuan losses.

“Chinese authorities should remain effective in containing the active outflows easily visible to them, and further index inclusions will help bring in portfolio investments for a few more years,” Yao and Daw wrote.

The People’s Bank of China’s counter cyclical adjustment factor, used in its daily yuan fixings, in particular is a “powerful tool,” they concluded. When applied, the yuan fix “is systematically stronger than otherwise.”

To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger

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