China’s yuan will lose 10 percent by the end of next year as U.S. stimulus cuts and heightened credit risk prompt an exodus of funds from the world’s second-largest economy, according to Daiwa Capital Markets.
Bond purchases by the Federal Reserve kept U.S. interest rates low and spurred demand for China’s higher-yielding assets, giving the Asian nation scope to “print a lot of money” that funded a credit boom without destabilizing the exchange rate, Hong Kong-based economists Kevin Lai and Junjie Tang wrote in a note today. The U.S. began reining in stimulus this year, coinciding with an economic slowdown in China.
“We believe the People’s Bank of China will have to keep printing money to ensure the economy stays afloat and not care too much about downward pressure on the currency,” Lai and Tang wrote. “This option could at least buy some time for the PBOC to fight the fire.”
Premier Li Keqiang is targeting a 7.5 percent expansion this year, which would be the worst performance since 1990. Industrial production, fixed-asset investment and retail sales all cooled more than economists estimated in the January-February period, while exports dropped last month by the most since 2009, reports showed in the past week.
The yuan will fall to 6.50 per dollar by Dec. 31 and reach 6.83 by the end of 2015, Daiwa forecast. The currency weakened 1.6 percent this year to 6.1489 per dollar as of 1:27 p.m. in Shanghai, China Foreign Exchange Trade System prices show. It is forecast to strengthen to 5.97 in 2014 and 5.90 next year, based on the median estimates in a Bloomberg News survey of analysts.
If investors think the yuan will drop substantially and hence pull more money out of the nation, “this downward spiral could easily lead to a full-blown currency and financial crisis,” the Daiwa economists wrote. They cut their 2014 economic growth estimate to 7.1 percent from 7.5 percent, and lowered their 2015 projection to 6.9 percent from 7.2 percent.
Bank of America Merrill Lynch yesterday cut its 2014 forecast for China’s expansion to 7.2 percent from 7.6 percent, saying data for the first two months were “significantly” weaker than expected.
Twelve-month non-deliverable forwards on the yuan slid 1.1 percent this week in Hong Kong, headed for the biggest loss since November 2011. The onshore spot rate lost 0.34 percent.