China | 2022 RMB outlook: getting worse before it gets better

Summary

A series of global and domestic macro fundamentals drove recent sharp RMB depreciation. We do not think it will lead to systematic financial instability risk as it is synchronized with depreciation of other currencies amid FED tightening measures. The PBoC has counter-cyclical tools to maintain the RMB exchange rate stable.

Key points

• Key points:
• The RMB to USD exchange rate experienced a bout of fast depreciation from 6.367 to 6.8 just within a couple of weeks, which aggravated investors’ concerns over the potential financial market turmoil.
• A confluence of macroeconomic fundamentals are behind this round of RMB sharp depreciation, including the diverging monetary policy between China and the US, the recent Omicron flare-ups and Shanghai lockdown, the shrinking China’s current account and accelerating capital outflows, etc.
• By applying Big Data methodology to construct China's Vulnerability Index (FX & Capital Flight), we conclude this round of RMB depreciation is different from that of 2020 or 2015, thus, it will not lead to systematic financial instability risk.
• More importantly, Chinese authorities have a series of counter-cyclical tools to maintain the RMB exchange rate stable.
• Looking ahead, we believe there is a chance for the RMB to fall above 7 in the coming months but it will eventually bounce back at year-end when macro fundamentals in China improve.

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