China’s yuan has been on a tear this year, but experts are predicting the run may be over — and it may even be poised for a downturn.
The yuan’s rise has quickened in August, pushing year-to-date gains against the dollar to 4 percent. Thus far, the currency has recovered a good part of last year’s fall of nearly 7 percent. And on Tuesday, China’s central bank set its midpoint rate for the yuan at 6.6597, the highest level in about a year.
All that is positive news for Beijing, as the government works to shore up stability ahead of a big leadership transition in the fall. An increase in capital outflows last year added downward pressure to the yuan, forcing officials to respond by boosting capital controls. It’s a move that experts say appears to have worked, supporting the yuan’s return this year.
And even though China’s economy has also held up better than most expected this year, experts say uncertainty for the second half of the year could change sentiment. Some analysts are starting to wonder whether gains thus far will be pared back.
The yuan rate “has been so stable so far this year that it has become a cause of concern,” said Macquarie analyst Larry Hu. The big question now, he pointed out, is what happens if the Chinese economy weakens or the U.S. dollar strengthens in the second half of the year. “The yuan’s stability so far this year could be upset by expectations of worsening depreciation.”
So far, as growth in the world’s second-largest economy has been stronger, “the economic case for a weaker currency has unraveled,” said Mark Williams, chief Asia economist at research firm Capital Economics. “But we think there is a good chance that the tide for the renminbi has turned,” pointing out that previous yuan bounces have before been reversed.
Indeed, a number of risks, such as financial vulnerabilities, remain when it comes to China’s economic growth. “Large and rising debt levels across China’s non-financial sector remain a significant risk factor,” according to a recent Fitch Ratings report.
Still, experts say the government has demonstrated its ability to smooth volatility in the economy and the yuan.
“Bear in mind: In the next few months, we’ll have the Party Congress,” said Mitul Kotecha, head of foreign exchange strategy for Asia Pacific at Barclays, referring to an upcoming political meeting that culminates with a twice-a-decade transfer of power in Beijing.
“It seems unlikely that China is going to want to have a rapid strengthening or weakening of the currency … we expect it to continue to show some stability,” he said. “There might be some risks of it moving slightly lower near the end of the year if the dollar bounces, but overall, we expect the renminbi to track the dollar sideways or lower in the next few months.”