Forex Comment Jun 01

As Trump threatens HK, G Sachs sees yuan drop to 7.25 – We doubt it 

Trump will be careful not to overplay his hand, while at the same time Chinese countermoves will tend to strengthen the yuan rather than hurt it

by Uwe Parpart
As Trump threatens HK, G Sachs sees yuan drop to 7.25 – We doubt it 
Image: AFP

(ATF) A Goldman Sachs analyst forecast on Sunday that the yuan would fall to a level of 7.25 per US dollar over the coming three months, to the 2007/2008 low. Given recent yuan weakness in response to US-China tensions and various measures the US President is threatening to launch against Chinese economic and financial interests, the forecast is not unreasonable. But it's little more than a kind of run-of-the-mill linear extension of what's been playing out since mid-May.

My view, after listening to Trump on China at his Friday news conference, is that he will be careful not to overplay his hand, while at the same time Chinese countermoves will tend to strengthen the yuan rather than hurt it.

Recent yuan softness was due to two main factors, as I pointed out last Friday: First, concerns that a Trump ban on US government pension fund investments in Chinese securities would be yuan negative, as would be forced delisting of US-listed Chinese firms. Second, that major Chinese financial institutions were putting investments into HK-listed SOEs in order to firm up the HK stock market. A third issue would be general capital flight out of China and Hong Kong.

In my view, the net effect of those actual and potential developments would largely balance out when it comes to yuan strength, with a tendency toward increased yuan value.

Today's counteraction by China to Trump's HK threats, the halting of some US farm imports by China, whether temporary or becoming more pronounced, will widen the China trade surplus and and push up the yuan. The US delisting threat against Chinese companies will actually tend to have the same effect as some major Chinese companies list at home and draw in funds. On the other hand, the mainland banks' support for the HK stock markets will prove to be temporary and not very large in scope. 

So, Goldman, I beg to differ and forecast yuan stability and a return to the 7.05 - 7.10 levels.

Today's FX action was limited with the yuan, on and offshore, trading in limited ranges.

The PBoC set parity at 7.1315 on Monday morning. It traded little changed at 7.1350 at 7pm HK time. CNH, the offshore CNY, moved from 7.1516 at the Monday opening to 7.1459 – also insignificant.

And the "vulnerable" HK dollar? At 7.7513 at 7pm, near the strong end of its trading band. No evidence of capital flight.