Behind China’s trade slump: A 6.8 CNY/USD rate end-2016?

HONG KONG – A series of trade indicators for November released by China today suggest that the woes in China’s external sector persist, says BBVA Bank. “Most importantly, the narrowing trade surplus in November doesn’t concur with the unexpected but significant slump in foreign reserves during the same period,” the bank says.

“As reported by the central bank yesterday, China’s foreign reserves experienced a monthly decline of US$87 billion in November, slightly below the record decline in August (US$94 billion), just after China announced the devaluation of its currency, causing large-scale capital outflows.

“More data is needed in order to piece together the whole picture. We suspect that the sharp decline in foreign reserves was caused by a confluence of factors, ranging from a valuation effect to beefed-up market interventions by Chinese authorities in the run-up to RMB inclusion into the Special Drawing Rights (SDR).

“There is no need to worry about the adequacy of China’s foreign reserves in terms of defending the exchange rate and stemming capital outflows. What’s happening is still in line with the “benign scenario” outlined in our expectations (see our Thematic Report about China’s Foreign Reserve).

“Meanwhile, it is almost certain that the RMB will continue its deprecating trend into next year. We maintain our projections at around 6.45 CNY/USD by the end of 2015 and 6.8 CNY/USD by the end of 2016.”  www.bbvaresearch.com (ATI).