RMB: Risk of more monetary than fiscal stimulus in the near term – Nomura

Analysts at Nomura suggest that recent announcements of policy stimulus from China have been viewed as positive for growth prospects, but RMB has continued to depreciate, and they see reasons to position for further weakness in coming months.

Key Quotes

“Pro-active targeted fiscal policy should support the economy, but expansionary monetary policy and the continued desire to keep liquidity should remain a driver of RMB weakness.”

“Amid an environment of policy easing, we still see a willingness from authorities to allow for more market determination/flexibility in RMB.”

“Nomura’s chief China economist, Ting Lu, also sees more downside risks to the economy ahead, including a potential intensification of US-led trade protectionism.”

“The market is not prepared for RMB to rise above 7.0. Our RMB survey also suggests that the market could be underappreciating the potential for a sharp move higher in USD/RMB.”

“Finally, we also believe the market has become somewhat desensitized to President Trump’s comments on China’s FX. After all, even if the US Treasury were to label China a currency manipulator, there would be review process1 (12- months) that is eventually followed by sanctions (if no reform/adjustments are made).”

“With Sino-US relations less favourable, China focussed on local economic stimulus and as China has already been directly targeted with tariffs from President Trump, we believe it is very unlikely China will deliberately implement a forceful RMB appreciation policy to appease the US.”