• Yuan will end next year at 8 per dollar, brokerage says
  • Analyst sees property slide, deposit flight upon devaluation

China’s yuan will tumble 19 percent by the end of next year as a depletion in foreign-exchange reserves forces policy makers to let investors set the value of the currency, said CLSA Ltd.

As Federal Reserve interest-rate increases buoy the greenback, defending the yuan will cut China’s currency reserves to less than $2.75 trillion by the middle of next year, said Amar Gill, head of Asia research at the brokerage. That will prompt the nation to move to a free-float regime in the second half, he said. CLSA forecasts that the Chinese currency will slump to 8 per dollar by the end of 2017, a weaker level than any of 44 other analyst projections tracked by Bloomberg. The median estimate is for a 3.7 percent decline.

“What can’t go on forever must come to an end," Hong Kong-based Gill said on a conference call Friday. As reserves fall, “it would make sense for Beijing to let the foreign-exchange market determine a market level for the renminbi because if it doesn’t then you would get an acceleration of outflows and a bigger depletion of reserves."

Concern about the yuan engulfed global markets in August, when policy makers unexpectedly devalued the currency, and again at the start of 2016 as the exchange rate slid to a five-year low. It’s rebounded since then to erase this year’s loss, and China’s foreign-exchange reserves increased in March for the first time in five months.

While most analysts surveyed by Bloomberg expect the currency to weaken, CLSA’s estimate puts it closer to the camp of bleaker bears such as Corriente Advisors’ Mark Hart and Hayman Capital Management’s Kyle Bass, hedge fund managers who predict minimum slides of 50 percent and 30 percent respectively.

Property, Banks

The brokerage painted a grim picture of the devaluation, predicting the yuan’s drop to as low as 9 per dollar will spur a 10 percent nationwide decline in property prices, deposit flight from banks and deflation in Hong Kong.

Airline, utility, real estate and construction stocks will be worst hit, while shockwaves from the slump will reverberate through to the economies of trading partners such as Australia, Taiwan and South Korea, CLSA wrote in a report distributed Friday. Things will improve in 2018, when the yuan will appreciate back toward 7 against the greenback, according to the report.

“There will be much pain for the region before the gains come through," CLSA wrote. “However, removing the renminbi overhang will allow a more sustainable rebound for Asian equities to follow."

Yuan Rebound

The Chinese currency gained 0.2 percent this year to 6.4829 per dollar as the Fed pared its outlook for interest-rate increases. While China’s reserves swelled by $10.3 billion in March to $3.21 trillion, that’s down by $517 billion from a year earlier. CLSA’s $2.75 trillion threshold is estimated based on the International Monetary Fund’s guidelines on reserve adequacy.

People’s Bank of China Governor Zhou Xiaochuan, an advocate of financial-market reforms who wants to put China on a long-term path toward a free-floating yuan, has sought this year to reassure investors that there’s no basis for continued currency weakness and he still has tools to manage the economy. There was no need to worry about a short-term decline in foreign-exchange reserves, he told Caixin magazine in an interview published Feb. 13.

As the yuan becomes more flexible, there will be some turbulence along the way, Markus Rodlauer, deputy director of the IMF’s Asia and Pacific Department, said in an interview in Washington this week. The Chinese currency’s real effective value hasn’t changed much since last year, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE