Update:RMB view,We still expect depreciation but at a more gradual pace

We revise our USDCNY forecast to 6.9 by end of this year, 7.1 in 2018, and 7.4in 2019. Before revision it was 7.1, 7.6 and 7.9 respectively. The revision for thisyear is due to the surprisingly weak US dollar against the other currencies, andthe upside risk in China’s growth outlook in H2 (please see our report on 17 July2017). The revision for 2018 and 2019 is mostly driven by our forecast revision forEURUSD, as our FX strategists have a more positive view on Euro than before.

    We still expect a moderate but persistent depreciation against the PBoC basket,by 2.2%, 2.7% and 4.9% in 2017-19. The key driver of this depreciationarypressure is the property bubble in China. The economy is increasingly dependenton the booming property and land markets (see our report China’s indispensableproperty bubble issued on 17 March 2017). To sustain high property pricesthe government will likely keep monetary policy stance loose in the next fewyears. The large wealth effect from the property bubble will continue to push updomestic demand for imports. We therefore expect the current account surplusto drop to 1.3% of GDP in 2017 and 1.1% in 2018 (1.8% in 2016), with risks onthe down side.

    This boom of domestic demand is evident from the balance of payments. On thetrade side, imports (excluding commodities and processing imports) grew at 0.6%in 2016 and 19.5% so far this year compared to -7.7% and 8.5% of export growth(Fig 1). In this exercise we exclude commodity imports to avoid the distortionfrom volatile commodity prices. We also exclude processing imports as they areparts for export purpose, hence not for domestic consumption. Other than trade,Chinese oversea spending has been rising sharply as well. This caused the currentaccount surplus to shrink (Fig 2). We expect this trend to continue in the nextfew years.