Although the renminbi may stay weak in the near term, asset managers are positive on the currency over the medium to long term.
Renminbi may stay weak in the near term mainly because China’s solid economic fundamentals would likely be offset by trade worries, as well as a mild economic slowdown amid the country’s deleveraging efforts.
Cary Yeung, head of Greater China debt at Pictet Asset Management, said a slowdown in the macro economy has prompted the Chinese government to relax its monetary policy.
This included a reserve requirement ratio (RRR) cut, which has led to a weaker renminbi in a knee-jerk reaction.
Market sentiment, meanwhile, turned negative amid trade concerns, putting Asian currencies broadly under pressure, including the renminbi.
Yeung said the co-existence of these forces may lead the renminbi to trade in a wider range, which is more or less in line with the country’s policy of introducing greater two-way volatility.
Pictet continues to be positive on the currency over the medium- to long-term.
‘We believe a massive depreciation in the currency is unlikely, thanks to the strong year-to-date capital inflow of $50 billion fuelled by China’s MSCI A-share inclusion and the opening up of China’s onshore bond market,’ Yeung said.
The Chinese authorities’ commitment to opening up the financial market further, liberalising its current account as well as promoting the greater use of the renminbi as a settlement, reserve and investment currency abroad will bode well for the Chinese bond market and currency.
‘We remain positive on the Chinese onshore bond market,’ Yeung said, adding that Chinese bonds continue to offer investors diversification benefits and attractive yields.
Citing an example, Yeung said A+ rated Chinese 5-year government bonds could fetch a yield of 3.4%.
Yeung oversees the Pictet-Chinese Local Currency Debt fund, which was launched in March 2015. The fund is available to accredited investors in Singapore and professional investors in Hong Kong.
The strategy, which is actively managed, invests predominantly in onshore Chinese bonds from both government and corporate issuers, with a strong preference for higher quality issuers.
Amundi, meanwhile, concurs that the medium-term outlook for renminbi is still constructive.
This is in view of a gradual recognition of the renminbi as a reserve currency, as well as China’s structural transitioning towards a new economy that’s less dependent on credit and the external environment.
Renminbi showed some weakness recently, but mainly due to short-term factors, it said in its latest cross asset investment strategy report.