During March we spent time visiting our mainland Chinese clients in a number of cities. Understandably, many of these meetings became discussions on the yuan’s exchange rate. Right now the currency is overvalued. Our central expectation is that the yuan will decline to something like fair value over the coming 12 months through a combination of internal devaluation (PPI inflation of around -5%) and nominal depreciation of around 10%.
While a gradual, ‘straight-line’ yuan depreciation would be in everyone’s interests, capital controls and a repeat of the August 15 step devaluation are key risks down the road. Of these two risks, which is more likely to happen? Click below to find out.