Analyse fra Commerzbank:
On Tuesday, China introduced a new, freer exchange rate system. As a result, Chinese macroeconomic weaknesses such as the excess supply of property and high corporate debt will have a stronger impact on the exchange rate. We have therefore revised our USD-CNY forecast upwards. Nonetheless, we still believe that the first US interest rate hike is more likely to happen in September than in December.
However, in the long run the German economy will take a hit because it will not be able to compensate for a loss of Chinese business with higher demand from the industrialised countries and/or a revival in domestic demand. In the new exchange rate system … On Tuesday, the Chinese central bank surprisingly raised the USD-CNY fixing rate by 1.86% versus the previous day to 6.2298. This was the sharpest daily depreciation of the renminbi against the dollar since 1994 and it caused quite a stir on the markets. However, of even more importance was the PBoC’s announcement that when setting the fixing rate, around which the market rate may fluctuate by +/- 2%, it will refer to the market closing rate on the previous day.
Consequently, if the USD-CNY market rate on the previous day closes nearly 2% above the fixing rate, the central bank can in theory set the fixing rate in the current trading session almost 2% higher. This implies that in the current trading day there is scope for a further rise in the market rate of up to 2%. This is precisely what happened on Wednesday and Thursday when the USD-CNY market rate climbed by 1.1% in total (Chart 1). In its communiqué1 the PBoC thus rightly states that market forces will have more influence on the renminbi exchange rate from now on.
The new, freer exchange rate system increases the chances of the Chinese currency being included in the IMF’s prestigious currency basket. … China’s problems will impact the exchange rate But this is only half the story as there are fundamental reasons why market forces have caused a significant renminbi depreciation. Indeed, market participants are evidently reacting to the deeper problems facing China – and not just since Tuesday. In fact, the Chinese central bank has sold currency reserves since mid-2014 in order to neutralise the downward market pressure on the renminbi which built up until last Monday (Chart 2). We still see two main reasons why China’s growth risks point to the downside, suggesting a further devaluation of the renminbi against the US dollar.
Problem one: High property inventories Property prices in China have been falling on a broad front for the past year (with the exception of a significant pick-up of property prices in the first-tier cities over the past quarter which we view as unsustainable due to extremely high floor space under construction). This is weighing on the construction sector and the raw materials industry. Furthermore, regional authorities have been generating less income from the sale of land to property developers so have been able to invest less in infrastructure.
Both of these factors are dampening China’s economic growth. Moreover, property prices are likely to drop further for a long time yet, even if the downward momentum may have slowed a little recently in the large cities due to government intervention. Indeed, various indicators suggest that it will take several years for the huge oversupply of property to be reduced, which is a precondition for a lasting stabilisation of property prices. By way of example, if it takes two years to build an apartment, the ratio of housing under construction to the additional housing required each year should be two. In fact, it is ten which suggests a huge over-supply (Chart 3).
Problem two: High private-sector debt The second problem facing China is the high level of private-sector debt, which mainly applies to non-financial companies. Data from the Bank for International Settlements show that private debt has risen to 180% of GDP, indicating that China has one of the highest private debt levels in the Emerging Markets space. Moreover, it has seen the sharpest rise over the past five years (Chart 4). Sooner or later, companies will start to reduce their high debt levels by raising saving and cutting investment. Such balance sheet adjustments pose a further significant downside risk for the Chinese economy. China‘s growth drops further,
… The property overhang and high corporate debt support our long-held view that the Chinese economy is doing much worse than the official growth forecasts of 7% suggest. Industrial production growth has weakened from 10% in autumn 2013 to current rates around 6%. Investment and retail sales have also been disappointing. The economic risks for China will point downwards for a long time to come. … which argues for an upward revision of our USD-CNY forecast In China‘s new exchange rate system, these economic problems will have more of an impact on the renminbi exchange rate. We have therefore raised our USD-CNY forecast and now expect 6.55 rather than 6.35 for the end of 2015. We also anticipate more weakness for other emergingmarket currencies, especially the Brazilian real; for USD-BRL, we have revised our year-end target from 3.40 to 3.75.
