The Chinese yuan has been on the up and up all through this year, outperforming other major currencies. Right now, the yuan is trading at 6.53 against the US dollar, which is slightly more than a 6% gain so far this year. Compared to last year, the yuan depreciated by 6.4% over 2016 to end the year at 6.95 against the US dollar. Therefore, a CNY forecast seems ideal at this moment to try to establish why the currency has been so impressive and how it will perform in the future.
What’s behind the positive CNY forecast?
By the end of last year, most experts believed that the yuan was going to keep falling. Reports by an analyst at Deutsche Bank showed that they expected the yuan to keep depreciating further through 2017 and 2018. In fact, they believed that the yuan would depreciate to 7.4 in 2017 and 8.1 in 2018. Instead, we are now experiencing the opposite, with more than a 6% rate of appreciation against the US dollar. So much so that analysts have now revised their CNY forecast positively.
At the time DB were predicting further depreciation, capital outflow from China was at an all-time high. In mid-2016, about $60 billion was leaving China per month, decreasing their forex reserves to $3 trillion. This was the main reason for the yuan’s depreciation, and many analysts believed it would continue to hurt the CNY forecast. In January, though, the People’s Bank of China (PBoC) decreased the yuan’s midpoint from 6.9526 to 6.9307. further capital controls were set to take effect in July, and these further decreased capital outflow.
By July, forex reserves had risen to $3.08 trillion, adding a further $24 billion in July alone compared to June’s $3.8 billion. Clearly, the capital control measures have worked in the yuan’s favour to produce a good CNY forecast.
What factors affect the value of the yuan in 2018?
Starting on the 18th of October, the 19th Chinese Communist Party (CCP) Conference will commence, through which there will be a reshuffle in leadership. It is during this CCP conference that new leaders are elected and previous ones step down. During this year’s CCP conference, President Xi Jinping is expected to retain his seat, but many of the party’s leaders are expected to step down. This CCP conference is usually a major factor affecting the CNY forecast, but this year’s event may not cause too much of a shakeup.
However, a more serious matter may affect the CNY forecast for 2018, and perhaps one that has been ignored for a while now. The appreciation of the yuan this year has made the currency seem attractive, but only for speculators. Fundamentally, there are still problems that could arise due to the capital controls imposed. For one, inflation is high and rising, as the government continues to allow the banks to lend money. Besides, foreign investment may decrease if the foreign firms are afraid they will not be able to take their money out of the country.
The problem with China’s capital control system is that it does not address the actual problem on the ground. Obviously, the Chinese are not happy about local investments, which is why they are so eager to invest elsewhere. With such an attitude, people will always find other ways to do what they want. Perhaps this is even why there has been increased demand for bitcoin in China lately, even though the Chinese government now intends to ban cryptocurrency trading.
On the other hand, the impressive results from the set capital controls may just prompt the Chinese government to ease the measures. President Xi has always intended to make the yuan flexible, and this may just be the time to do so.
Our CNY forecast for 2018
The yuan has shown great improvement this year so far, but most of the appreciation has been boosted by a weak US dollar. As the US dollar stabilizes, the yuan may experience some depreciation toward the end of this year. It may end 2017 at around 6.7 against the US dollar, and then further down to 6.5 by the end of 2018. Of course, these are just projections based on the current trends and market conditions, so you should always be open to revising your CNY forecast as news breaks.