Long-term RMB forecast (hktdc.com)

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Standard Chartered Bank

17 January, 2002

Long-term RMB forecast

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Forecasting exchange rates for a 7 - 10 years' time frame is a very tricky business. Your forecasts are as good as mine.

I append below something I prepared about a year ago in response to a similar request from another customer. This still applies today.

The other dimension we need to think about is the direction of the USD. While the USD has been strong in recent years, there are clearly concerns over the medium term, particularly given the substantial, and rising, US current account deficit situation. Should the USD correct significantly downwards, this would also have implications for the CNY/USD.

All in all, for forecasting purposes, I think the RMB would remain stable against the USD in the next 3 years. After that, I would put

(a)	a 50% probability that the RMB would appreciate against the USD, say at 5% per annum (this is against a scenario that China continues to make good economic progress),

(b)	a 20% probability that the RMB would depreciate against the USD, say at 7% per annum (this implies that China's reform and modernization is running into difficulties), and

(c)	a 30% probability that the RMB would continue to remain stable against the USD.

Hope this is useful,

QUOTE

... I attached a powerpoint file which I used sometime ago on RMB. Basically, my views are as follows:

(a)	In the short term (meaning in the next 12 months or so), given a healthy balance of payments, the RMB is likely to remain stable. In any case, China's exports have been doing far better than most of its competitors despite the RMB's strength vis-a-vis other developing countries. Chances for a RMB devaluation are very low. But of course, one should keep an eye on the relative strength of the USD against other currencies (as the RMB is almost informally pegged against the USD).

(b)	In the medium term (say around a 5 years time frame), the fate of the RMB depends on how successful the reform of Chinese financial system will be. In the powerpoint file attached, you could see a chart showing the fast growth in China's money supply (relative to GDP). This rapid growth in money supply is partly due to the problems of the banking system. Rapid growth in money typically leads to inflation problems and depreciation pressures. While inflation is not an issue now, this could not be taken for granted.

(c)	In the longer term (say 10 years), there will be a point when the RMB would appreciate, if the Chinese economy continues to reform and develop. This is due to continued productivity improvement which would ultimately lead to an appreciation of the currency. Experiences with Japan, Taiwan and Korea illustrate this.

END QUOTE

K.C. Kwok

This memorandum is issued by Standard Chartered Bank and is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Opinions expressed herein are subject to change without notice. This memorandum has been prepared solely for information purposes and for circulation and no responsibility is accepted for use of or reliance on information provided herein. This memorandum does not constitute any solicitation to buy or sell any instrument or to engage in any trading strategy. Standard Chartered Bank, or any company within the group of which it forms part, may have a position in any of the instruments or currencies mentioned.