Qi Sun, emerging Asia economist at the group, is anticipating a further 3% appreciation in the renminbi against the dollar during the rest of 2013 and beyond – almost twice its rise year to date.
Fears over China’s ‘hard landing’ have subsided and China’s economic recovery has weakened since March, which Sun said suggested market conditions and policy factors were contributing to a stronger yuan.
In a reseach paper by Axa IM, Sun pointed to three primary factors supporting the argument for a stronger yuan – the momentum of onshore trades, capital inflows that have resulted in “global healing” and a rising interest in financial stability.
He said: “The growing concern for financial stability via higher gross leverage in the economy, and the return of food price inflation, will lead to calls for tighter monetary policy in China and thus for a wider China-US rate differential.”
He added a floating currency was a far easier reform than many for policymakers, adding that opening capital accounts and liberalising bank deposit rates could challenge financial stability and therefore had to be handled with care.
Sun said: “The ultimate goal of renminbi reform is to achieve full convertibility, which requires a floating exchange rate scheme as a target. In our view, having such a target will help achieve the goal of long-term sustainable growth in China.”
