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CNY: More volatile and vulnerable - Commerzbank

In view of analysts at Commerzbank, China’s debt problem is also having more direct impacts on CNY.

Key Quotes

“First, to ease the debt burden for corporates, the PBoC would have to keep interest rates low. Hence, CNY will be under pressure to depreciate, in particular as long as the Fed continues to tighten monetary policy. However, as we expect the Fed’s rate hiking cycle to end in 2019, this could reduce the upward pressure on USD-CNY which is one of the main reasons why we still see a chance that the PBoC will be able to defend the 7.00 level in USD-CNY well into 2019. This scenario is based, however, on the assumption that while the trade conflict with the US isn’t ultimately solved, a devastating escalation will not be in the interest of the negotiating partners either.”  

“Furthermore, Chinese borrowers have significantly increased offshore borrowing since 2016. As a result, China’s foreign debt picked up strongly in recent years, suggesting that Chinese corporates are increasingly exposed to FX risks which need to be hedged. The repayment of foreign debt and increased hedging activities would, on the one hand, bring about more volatility and vulnerability to CNY exchange rates. On the other hand, it would increase the PBoC’s motivation to prevent a sharp CNY depreciation to avoid additional financial stress for corporates.” 

“In the end, CNY is likely to remain under depreciation pressure as long as the long-term growth outlook doesn’t improve considerably. For that to be the case, China would have to tackle the corporate debt issue in a timely and sustainable manner as long as it is still possible to restructure debt without triggering a disorderly adjustment of industrial and financial imbalances.”

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