I like to bet on as close to a sure thing as you can find - Bobby Riggs The renminbi was down 5.71% YoY against the USD in 2018 on concerns about slowing domestic growth under the clouds of domestic deleveraging, a trade war with the US and a shrinking current account surplus (estimated at only 0.8% of GDP for full-year 2018). The market is predominantly bearish on the yuan with many players seeing it weaken beyond 7 per USD in 2019. Why am I still betting on renminbi appreciation then? I think the market is overly bearish on China’s BoP position, underestimating the financial account inflows and exaggerating the fears about capital outflows.
The flow support for the renminbi from the current account has dwindled along with the surplus. Net FDI inflows have also dropped. Hence, the estimated basic surplus has dropped below 1% of GDP (Chart 1). Many players are betting on a current account deficit this year.
However, China’s external balance may not be so bearish. Firstly, China has sped up the opening up process for foreign investment and pledged to improve its structural behaviour such as IP protection and forced technological transfer1. Together with still stringent capital control, this may boost net FDI inflows.
Secondly, a slowing economy will constrain China’s imports and slow the growth of its service trade deficit by slowing down outbound tourism. Meanwhile, China has diversified its exports from the US to other countries, notably the Belt & Road Initiative (BRI) countries (Chart 2). So export growth in 2019 may not drop, or not drop as much as the market expects under the trade war. All this will help prevent the current account and basic surpluses from further erosion, or even boost them2.