Goldman Sachs two RMB drivers

06 January,, London – As recent days have portrayed, Goldman Sachs argues that a key uncertainty for the 2016 is the degree to which the RMB will depreciate.

As we start the year, hardly the best gauge of currency market expectations – non-deliverable forward yields, are pricing a 5.5% depreciation of the RMB against the USD for the 2016 ahead, while Goldman Sachs’ conversations with clients put consensus closer to 10%.

Two RMB drivers

Goldman Sachs has examine the RMB through the view of China’s balance of payments (BoP), where the global investment bank sees two main drivers.

First, “falling oil prices are a positive terms of trade shock, which is boosting the current account surplus, exerting appreciation pressure,” Goldman Sachs noted.

Second, the potential for additional capital outflows is clearly large, particularly if RMB devaluation continues rapidly. Thus the BoP should assess these offsetting forces. With crude oil prices near 11-year lows, the current account surplus could become roughly $400bn this year, from $300bn last year and $220bn in 2014, even allowing the services trade deficit to remain widening. This therefore provides further room in the balance of payments to absorb capital outflows, increasing the threshold above which reserve accumulation becomes negative.

two rmb drivers

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“We estimate that threshold in the -$350bn to -$450bn range, beyond which reserve losses – and depreciation pressure – would be sizeable,” Goldman Sachs concluded.

Of course, this balance of payments perspective is distinct from policy makers’ reaction function, where recent days might point to a stringer willingness to weaken the RMB.

“The bottom line is that China’s BoP is quite healthy, such that outflows have to be very large to create depreciation pressure on the RMB. The “room for gloom” on the RMB is therefore, at least from a BoP perspective, quite limited,” Goldman Sachs finished.

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