A strong RMB into 2022

CHINA ADVISORY - Report 07 Jan 2022 by Andrew Collier

China’s yuan has strengthened steadily for much of 2021. Capital inflows remain strong, while exports have maintained relative strength. This is likely to continue in 2022.

For 2022, China’s RMB policy will confront a number of challenges. First is the outlook for exports, particularly to the U.S., which may be tightening credit through a Fed rate increase. Decoupling has barely caused a ripple in Chinese exports to the U.S. Second is the prognosis for Chinese domestic demand, which so far remains strong, with the latest PMI index confirming the strength. The Caixin China General Services Business Activity Index rose to 53.1 in December from 52.1 the previous month. A number above 50 indicates an expansion in activity. Caixin’s manufacturing PMI increased to 50.9 from 49.9. Both are positive indicators for domestic and international demand.

Last, is the impact of the downturn in the property sector, which is the wild card. If the Evergrande default is not contained, it could lead to a national crisis in property values and in faith in China’s economic growth in general. That would prompt illegal capital flight and hurt domestic demand.

A more likely outcome is a property crisis “contained” to a number of provinces that does not filter out nationally due to restricted messaging along with targeted stimulus. The broader question, of course, is the country’s medium to long-term growth prospects, which are harder to predict, given the uncertainty surrounding Covid and global economic growth.

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