International | Sep 22 2008
By Chris Shaw
Having previously been Overweight on the Chinese Yuan, Standard Chartered has now downgraded to a Neutral rating, suggesting such a stance is more appropriate in view of the recent interest rate cut by the People’s Bank of China (PBoC) and the current strength in the US dollar.
In the group’s view the change in rates signals something of a policy shift, with the future focus now likely to be on a much slower pace of currency appreciation and the exact timing of any moves to be determined by the outlook for inflation. While this supports the group’s downgrade, a shift to an Underweight rating is not justified in its view as there appears little chance the PBoC will want the currency to actually lose ground against its major trading partners.
Other factors also support the group’s downgrade, as its evidence suggests Chinese economic growth is slowing to a more sustainable level of almost 10% this year and just under 9% next year. As well, Standard Chartered suggests China’s trade surplus has peaked on the back of weaker exports to the US, while real investment growth has also weakened as companies deal with higher costs.
While the group sees the fight to contain inflation as still in the balance at present, it suggests Chinese policymakers see the battle as having been won, with inflation set to moderate in coming periods. On the fiscal side of policy, it sees the government as well placed to deliver any needed stimulus, which would suggest further policy easing going forward.
All of this adds up, in Standard Chartered’s view, to a decreased risk of any further significant strengthening of the currency in both the shorter and medium terms, resulting in modest adjustments to its currency forecasts. Against the US dollar the group now expects a rate of 6.82 at the end of September against 6.75 previously, while at the end of the year it is now forecasting a rate of 6.78, up from its previous forecast of 6.70.
Looking further ahead it expects a rate as at the end of June next year of 6.91 now as against 6.80 previously, while against the euro it is forecasting rates of 9.68 at the end of September, 9.76 at December 31 and 8.94 as at June 30 next year. This compares to previous estimates of 9.58, 9.64 and 8.84 respectively.
Against the yen it is a similar story, with Standard Chartered now forecasting rates of 15.98 as at September 30, 15.78 at December 31 and 16.21 as at June 30 next year, against its previous forecasts of 16.15, 15.97 and 16.47 respectively.