CNY

A bearish scenario for the renminbi could manifest if China’s economy fails to re-ignite. There is a risk that the government’s policy response is not forceful enough to sustainably turn the property market around, awaken dormant animal spirits, and counteract the drag on exports and production within a sluggish global export environment. An extended period of subpar growth might unnerve markets, given the potential financial stability and deflationary risks that could be enflamed. We think this sort of backdrop could accelerate renminbi-negative capital flight out of the country. China inflation, annual % change

While nominal interest rate differentials may favour the US dollar for some time, we believe this renminbi headwind has topped out. Diverging growth trends should continue to assert themselves as a currency tailwind. In a world economy where recession risks ought to endure for many major economies, a sturdier China should encourage renminbi-positive capital inflows. Our baseline view is that the renminbi gradually strengthens over 2024. When combined with a softening US dollar, we see the exchange rate edging down to 7.05 by mid-2024 before moving sub-7.00 later in the year. China credit impulse and activity, annual % change