USD/CNY: Increasingly hawkish Fed to lift the pair next year – ING

The yuan has recently been very strong against the dollar even as the US Dollar Index has been rising. However, economists at ING expect the CNY to depreciate against the USD through next year. Here are their three calls for China in 2022.

State-Owned Enterprises to return as the core of investment entity

“As intense policy actions are expected to be toned down, the pattern of economic growth should start to return to normal. But this will involve more reliance on State-Owned Enterprises (SOEs) to invest in infrastructure for renewable energy and technology. Private-owned enterprises (POEs) will play a role to facilitate these projects when SOEs contract out work to the private sector.”

No change to the slight easing of monetary policy

“Monetary policy is not likely to be relaxed unless it looks like economic growth is at serious risk, and the probability of this is low as the government can control the pace of investment growth. We believe that the likelihood that the People's Bank of China (PBoC) cuts policy rates or the Reserve Rate Requirement (RRR) is small.”

Portfolio inflows via opening-up of the capital account

“The opening-up of China’s capital account has attracted portfolio inflows. These inflows will slow if further opening in 2022 starts to look less likely. In this event, there will be more two-way portfolio flows depending on relative asset prices onshore versus offshore. This means the yuan could be volatile. And the tendency towards yuan depreciation in the face of an increasingly hawkish Fed will be significant. This should end up with a weaker yuan against the dollar by the end of 2022.”