A note from ABN Amro on their outlook for China
These the highlight points from a detailed note:
- 2018 marks the resumption of China's gradual slowdown ... driven by financial deleveraging and initial drags from trade conflict US
- Should downside pressures intensify, Beijing has more room for stimulus
- Yuan weakness also cushions impact tariffs, but we expect some recovery
- All in all, we expect China's slowdown to remain gradual in 2019 and 2020
- Main risks: tensions with the US, other geopolitical risks, high debt levels
Further on the yuan:
In our base scenario, we still do not expect the PBOC to tolerate much sharper depreciation versus USD, for two reasons.
- First, Beijing has learned lessons from the market turbulence seen in 2015-16, when sharp CNY depreciation expectations triggered large capital outflows and downward pressure on FX reserves. Capital outflows have indeed risen this year and FX reserves have started to fall again, but not as dramatically as the moves seen in 2015-16.
- Second, in its last bi-annual report on macroeconomic and foreign exchange policies of major trading partners published in October, the US Treasury's language versus China turned more hawkish.
It is likely that currency developments will be included in future negotiations between the US and China. In our base scenario, we expect dollar strength to fade next year
Outlook for the currency:
- we expect CNY to recover versus USD (our end-of-year forecasts for 2019-20: 6.70)
- in case of a severe escalation of tensions between the US and China, the yuan may drop well below 7.0 in our view
