Despite many commentators calling for a large one-off devaluation of the renminbi, Capital Group says this would be economically and politically damaging for China.
In a recent update, Capital Group China affairs specialist, Andrew Dougherty, said China is more likely to pursue a gradual depreciation of the renminbi in the range of 5 per cent to 8 per cent against the US dollar this year.
A one-off devaluation of 20 per cent, he said, would be “politically and economically damaging for China”.
“The country’s top leaders have said they will not do it and going back on their word would further shake confidence in China’s monetary policy,” Mr Dougherty said.
“If they depreciate the currency by 20 per cent overnight, investors would panic.”
Mr Dougherty pointed out that the People’s Bank of China has said it does not believe its currency is overvalued.
However, he said that if China’s unemployment starts rising and efforts to limit capital outflows are unsuccessful, a large one-off depreciation of the renminbi would be more “realistic”.
Mr Dougherty also noted that China’s GDP is likely to grow in the range of 3 per cent to 4 per cent this year. This is contrary to official growth expectations which are forecast at above 6 per cent.
While the country faces “serious challenges”, Mr Dougherty contended that a hard landing will be avoided.
“China will gradually solve its problems and its economy will bounce back.”