Given the combination of factors
including, ongoing growth concerns, falling inflation, possible rate cuts
and strong USD trend, we expect only mild weakness in the CNY over 1H 2015,
before resuming some strength in 2H 2015. In particular we see USD/CNY at
6.22 for 1Q and 6.23 for 2Q. For 3Q and 4Q 2015, we see USD/CNY at 6.20 and
6.15, respectively. We like to reiterate that there will be more 2-way moves
and higher volatility in USD/CNY.
While recent economic data
failed to show signs of improvement with some even calling for a hard
landing, we however see these short term pains as a symptom of economic
rebalancing. It should come as no surprise that growth will continue to
decelerate and that this deceleration should not be misunderstood as a hard
landing. We see growth of about 7% for 2015 and 6.5 - 7% for its 13th
Five-Year Plan (2016-2020).
Already, China has started to
rebalance its economy, focusing on quality of growth, rather than the
quantity of growth; and pushing for a consumption-driven economy. But these
efforts take time to yield results. International experience shows that if
China undertakes economic rebalancing towards a consumption-driven economy,
wage-induced inflation will build up. In theory, this suggests higher
nominal interest rates and/or stronger local currency to mitigate the
inflationary pressures.
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