Wall Street financial giant JPMorgan Chase’s report predicts that the Renminbi (RMB) will depreciate by 10% to 15% due to the US-China trade war. The three major American investment giants have complained about the difficulty of withdrawing funds from China.
In a recent report titled “Preparing for the Storm,” JPMorgan Chase economists, led by Jahangir Aziz, stated that emerging economies will be impacted by President Trump’s commitment to increasing tariffs, with expectations for substantial changes in trade policy towards China to occur earliest. “Undoubtedly, China will be the most severely affected,” Aziz wrote.
JPMorgan Chase expects the average effective tariff on China to increase from the current 20% to 60%, which may damage the prospects of China’s economic growth next year.
It is projected by JPMorgan Chase that in response to tariffs, the Renminbi will devalue by 10% to 15%, lower than the expected devaluation of 28% to 30%. Should the People’s Bank of China repeat its actions from 2018 to 2019 (allowing the Renminbi to devalue to offset the 70% increase in US tariffs), the Renminbi could devalue by 28% to 30%.
Aziz also stated that concerns about financial stability being compromised could deter Beijing from implementing more significant devaluation measures.
The Professor of International Affairs and Business Department at South China University, Sun Guoxiang, explained that there are four main constraints on the depreciation of the Renminbi. These include dynamic supply and demand in the foreign exchange market, capital outflows, increased import costs, domestic inflation pressures, and international pressures that could view significant devaluation as “currency manipulation,” potentially leading to further sanctions and increased pressure on China’s exports.
Trump recently announced on his media platform, “Truth Social,” that a 25% tariff would be applied to products from Mexico and Canada, with an additional 10% tariff on goods from China. This announcement led to a 0.3% depreciation in the offshore Renminbi, dropping to its lowest level since July 30th of this year. The onshore Renminbi also experienced a decline after the market opening.
Offshore Renminbi refers to Renminbi circulated and traded outside mainland China, with its exchange rate largely determined by market supply and demand. Onshore Renminbi, traded and circulated in mainland China, is managed and regulated by the People’s Bank of China. If the discrepancy between the two exchange rates widens, the People’s Bank of China may intervene to maintain its international image.
Ben Bennett, Head of Asian Investment Strategy at LGIM, one of Europe’s largest asset management companies, stated that while the direction of Renminbi depreciation is clear, Chinese authorities may be concerned about excessive devaluation leading to capital outflows.
The exit of foreign capital from China implies selling Renminbi, reducing China’s foreign exchange surplus, a scenario that China is reluctant to witness. In recent statements, three major US investment giants have highlighted the challenges associated with withdrawing from China.
During the “International Financial Leaders Investment Summit” organized by the Hong Kong Monetary Authority, David Solomon, CEO of Goldman Sachs, expressed concerns about weak consumer confidence and difficulties in fund outflows from China. The global investors remain cautious about deploying funds in China, hoping to see improvements in consumer spending and continued progress in capital market openness.
Ted Pick, CEO of Morgan Stanley, echoed Solomon’s sentiments, emphasizing the importance of policy transparency.
Jeffrey Perlman, CEO of Warburg Pincus, a US private equity firm, supported Solomon’s concerns, citing challenges the company faced in withdrawing $1 billion from China last year.
Data from the State Administration of Foreign Exchange of China shows that as of the end of September this year, China’s foreign exchange reserves stood at $3.3164 trillion. China’s total external debt, as of the end of June, was $2.5453 trillion. As a result, the net forex reserves are actually slightly over $770 billion. China has also been increasing money supply in countries like Africa for a long time.
Furthermore, Trump recently appointed international trade lawyer Jamieson Greer as the US Trade Representative. Greer previously served as Chief of Staff to Trump’s former Trade Representative, Lighthizer, advocating for a strategic decoupling from China.
A shrinking trade surplus for China implies diminishing foreign exchange reserves, potentially weakening Beijing’s ability to maintain the Renminbi exchange rate.