The view that the renminbi may weaken further against the US dollar in 2019 is likely ill-founded – indeed, various factors could lead it to rise.
The renminbi fell by 5.71% year-on-year (YoY) against the US dollar in 2018 on concerns over slowing domestic growth clouded by domestic debt reduction efforts, a trade war with the US and a shrinking current account surplus (estimated at only 0.8% of GDP for full-year 2018). Financial markets are predominantly bearish on the renminbi, with many participants expecting it to weaken beyond 7 per USD in 2019.
Why bet on the renminbi appreciating then? Basically because markets appear overly bearish on China’s balance of payments position, underestimating the financial account inflows and exaggerating the fears over capital outflows.
Capital flow dynamics
The flow support for the renminbi from the current account has dwindled along with the surplus. Net foreign direct investment (FDI) inflows have also dropped. Hence, the estimated basic surplus has dropped to below 1% of GDP. Many market participants are forecasting a current account deficit this year.
