Based in Hong Kong, Seeing Cheung, Assistant Vice President at SHK Private, analyzes China’s and Hong Kong’s financial markets.
Today, she explains the « Trumponomics » impact on the Chinese currency. (Disponible en Français)
“Trumponomics” increases capital outflows from China (09/12/2016)
«A strong Renminbi depreciation against the Dollar will make the Chinese authority task to restrain the capital outflows even more difficult.»
What is “Trumponomics”?
The rhetoric of Donald Trump, the new elected president of the United States (whom inauguration will take place 2017 January 20), during its election platform campaign suggests that he is going to focus himself on the American economy revitalization to stimulate domestic GDP growth. Per his election platform, he will not rely on monetary policy, definitively wishing to put an end to the decade of quantitative easing and of interest rates near zero. The market called it “Trumponomics”, which means focusing more on fiscal policy than on monetary policy. This market understanding and forecast explain why the Dow Jones index has not stopped climbing since mid-November, beating historic records. The investors target in particular the consumption sector, which may both benefit from tax cuts and additional public expenditure on infrastructure. The market bet on a pick-up in inflation, accompanied by an increase of the interest rates. Some are predicting two to three interest rate hikes in 2017 and once this month, even if the mandate as Federal Reserve chair of Janet Yellen – against a too fast interest rate growth – runs until her contract end in 2018. It goes without saying that this new paradigm is favorable to a steady Dollar appreciation, a trend we observe since November 9th.
What will be the consequences for the Renminbi against Dollar exchange rate?
If the US Dollar appreciates and keep getting strong in 2017, then the Renminbi will depreciate further in 2017. Since the Renminbi entered the IMF SDR (« Special Drawing Rights ») basket on 1 October 2016, the People Bank of China let it fluctuate according to the market forces (won’t intervene till near 7.0 to 1 Us dollar). The reference is the CFETs RMB index basket, which measures the relative strenght of the Chinese currency against a basket of 13 currencies. Having said that, a strong rise of the Dollar against the Renminbi is rather favorable to the Chinese exports. However, this trend may trigger a trade war, with American authorities possibly introducing high import taxes. Besides, a strong Renminbi depreciation against the Dollar will make the Chinese authority task to restrain the capital outflows from the country (using many different tools) even more difficult.
What will be the impact on the Hong Kong economy?
This situation has double-edged effects. The continuation of the Renminbi depreciation against the Dollar may support the valuation of the Hong Kong financial assets. For example, the mainland China investors will keep buying H shares (listed in Hong-Kong) in order to hedge their positions, in long run, using the “Southbound” of Shanghai-Hong Kong Connect or the Shenzhen-Hong Kong Connect. On the other hand, the tourism, and consequently the retail especially the luxury brand and jewellery retail sector could again suffer, because of an expansive Hong-Kong Dollar (pegged to the Dollar) compared to the Renminbi.
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