Original by Wang Tao China Wealth Management 50 Forum 2024-02-07
The global foreign exchange market is expected to be volatile in 2023, with higher volatility in the exchange rates of major currencies. In 2024, the Fed's monetary policy may turn from contraction to relaxation, and the global foreign exchange market will still face great uncertainty under the influence of multiple factors. In this context, the China Wealth Management 50 Forum (CWM50) held a symposium on "RMB Exchange Rate and Global Foreign Exchange Market Outlook in 2024" to provide reference for relevant policy formulation and decision-making of market players. Wang Tao, Head of Asian Economic Research and Chief China Economist of UBS Investment Bank, attended the meeting and delivered a keynote speech.
Wang Tao said that looking forward to China's economy in 2024, GDP is expected to grow by 4.6%, exports will generally improve slightly this year, and real estate will still be a big drag on the economy. As for the international economic environment, the forecast for a slowdown in U.S. economic growth is mainly due to tight monetary policy and declining fiscal stimulus. Affected by the marginal changes in the economy of China and the United States, the Fed's interest rate cut and the depreciation of the US dollar, the RMB is expected to appreciate slightly against the US dollar this year, but there is no particularly strong room for appreciation, and it is possible to depreciate slightly in the first quarter. In terms of risks, the risks of the internal environment mainly come from the uncertainty of real estate stabilization, and the risks of the international environment mainly come from the Federal Reserve's interest rate cut and the overall U.S. election.
1. China's economy and balance of payments outlook in 2024
This year has been a year of stabilization and consolidation, and we forecast GDP growth of 4.6% this year. The economic growth rate is slightly lower than in 2023, mainly because the low base has basically disappeared, and the economy is still dragged down by the real estate downturn. Our baseline forecast for the economy to stabilize is that under the effect of the previous policy easing, and it is expected that the new stable real estate policy will be introduced, the area of new construction starts and sales will be able to stabilize in the first half of the year, the seasonally adjusted month-on-month decline will stop, and the second half of the year will recover, with a 10% decline in new construction and a 5% decline in sales over last year, while real estate investment may fall by about 5%, which is significantly lower than last year's decline.
Even if real estate stabilizes at a low level, it is still a big drag on the economy. In addition to the decline in real estate investment and construction, it will also drag down the economy through two channels:
The first channel is to affect local government spending, including investment in infrastructure. At present, the central government will make more efforts. In 2023, the central government issued an additional 1 trillion yuan of special treasury bonds, which may be used this year. Another 1 trillion yuan of special treasury bonds may be issued this year. At the same time, there may be more replacement bonds to resolve local hidden debts this year than last year, reaching 2 trillion to 3 trillion yuan. Even so, because in many cases in the past, "stable growth" relied on local governments and financing platforms to increase leverage, but this year this method will not work, and the hidden debt will be controlled and contracted, so the overall expansion of broad fiscal will be very limited. Although it seems that the fiscal force in 2023 will be strong on the surface, in fact, in the first eight months or so of 2023, the big fiscal will be in a state of contraction, which is a negative drag on the real economy. The situation will improve this year, but the overall drag on the fiscal situation of real estate will remain.
The second channel is that the weakness of real estate will dampen residents' consumption and confidence. The current benchmark forecast is that household confidence will stabilize at a low level in the case of real estate stabilization, and consumption can continue to recover and repair growth after the epidemic. But confidence remains sluggish, and excess savings are not expected to be released on a large scale. Consumption has only continued to resume growth with the improvement of employment and the service sector, which is a very important aspect of stabilizing growth this year.
At the same time, we expect exports to improve slightly this year. Although we expect the U.S. economy to weaken significantly – around 2.2% in 2023 and perhaps only 1.1% this year, we believe that destocking in developed countries and the post-pandemic shift in goods-to-services consumption have been completed. In addition, the global technology product cycle, that is, the electronics cycle, has bottomed out and begun to pick up, and this year's exports are expected to improve compared to last year.
Overall, the risk of real estate stabilization in the first and second quarters is greater, and the downward pressure on the economy is still greater. The economic situation in the second half of the year will be clearer. In terms of domestic policy support to stabilize the economy, the special treasury bond funds issued at the end of 2023 can be used in the first quarter of 2024. If the downward pressure on the economy is relatively strong and it is difficult for real estate to stabilize, then April or July may become the time point for the policy to continue to increase. Overall, the effect of policy support in the second half of the year may be more obvious.
In terms of balance of payments, exports are expected to improve. Although there is little room for energy prices to rise, the trade surplus will not expand because the price of imported products will not fall as much as in 2023, and the import prices of other electronic products may recover. At the same time, the deficit in the service sector will further widen, mainly due to the further recovery of overseas tourism. As a result, the current account surplus is expected to narrow for the full year. In terms of capital flows, FDI is likely to improve this year, but FDI is still likely to be lower than the mainland's OFDI, so there may still be a deficit in FDI. In addition, the overall demand of domestic residents and enterprises to allocate overseas assets is still large, so the capital item is expected to be a net outflow, perhaps a little smaller than last year.
2. Outlook for the global economic situation in 2024
In terms of global economic conditions, the overall growth rate of major economies such as the United States and Japan is expected to slow down. From the perspective of the United States, UBS predicts that the growth rate of the United States will increase from 2.2% in 2023 to 1.1% in 2024, and by the second and third quarters of 2024, UBS predicts a technical recession, that is, negative growth for two consecutive quarters. We have observed the following reasons: First, the slowdown in credit growth. Although the US economy is still relatively resilient under the pressure of current interest rate hikes, credit growth has actually begun to decline, and lending conditions have begun to tighten significantly. Second, the decline of fiscal policy will be more obvious this year. Fiscal support contributed a percentage point of GDP last year, and this year it may be basically zero, which is also very important. Third, the excess savings of the household sector have been basically consumed. The consensus expectation is that the Fed may cut interest rates by about 100 points from the middle of the year, and there will be some volatility in the market with the release of CPI and economic, employment and other data. The UBS global team believes that the decline for the whole year is relatively large, with 250 points, which is contrary to the market consensus. However, UBS is more optimistic about inflation, believing that inflation in 2024 can fall back to around 2.5% by the end of the year. And the Fed has historically cut interest rates fast and slowly, and we believe that once the rate cut process begins, the rate cut will be relatively fast. Regardless of UBS's forecast, the consensus expectation is that the Fed will cut interest rates this year, and the yield on the 10-year US Treasury note, which has fallen quite a bit recently, reflects this expectation. It is predicted to drop to 3.6%~3.8% by the end of the year.
In terms of the European economy, UBS believes that the eurozone economy will be tepid this year, with the same growth rate as in 2023. The economy will grow by 0.5% in 2023 and is expected to reach 0.6% in 2024. In terms of inflation, the European Central Bank (ECB) is cutting interest rates a little slower than in the United States, and interest rate differentials are expected to narrow, with the euro appreciating slightly.
In terms of the Japanese economy, the most bullish in the market this year should be the yen. Of course, interest rates and exchange rates in all economies are likely to fluctuate significantly in the first quarter, as the Fed's policy and inflation situation are uncertain, and there is a lot of uncertainty about the economies and inflation of other countries. We believe that the Japanese economy will generally decelerate significantly this year, with growth likely to be less than 1%. The main reason is that under inflation, residents' real income has been damaged and consumption has been sluggish. But the most important thing for the yen is inflation expectations. Japan's annual spring wage negotiations take place around March, and there will be more comprehensive news in April. The market is focused on how much wages will rise and whether they will be above the inflation target of 2%. Our current judgment is that there is a high probability of a wage increase of 3% or more, and we expect the Bank of Japan to raise interest rates from -0.1% to 0% in April and another 25 basis points in July. Therefore, although there may not be much movement in the first quarter, we believe that the yen is likely to appreciate to 130 against the dollar by the end of the year, and the yen's appreciation is clearly more clear than that of the euro.
3. Changes in the RMB exchange rate in 2024
The RMB exchange rate is mainly affected by the stabilization of the domestic economy, the Federal Reserve's interest rate cut, and other monetary conditions. We predict that the renminbi is expected to appreciate slightly against the US dollar this year, but there is no room for particularly strong appreciation. As mentioned earlier, the mainland's current account is still in surplus, but it is expected to narrow and there is no obvious support. In the baseline scenario, real estate and the economy are forecast to stabilize. Therefore, the variable of the exchange rate is to look at the United States, and the other is to look at the trend of the dollar against other currencies. The U.S. economy slows down, inflation falls, and the Fed cuts interest rates are high probability events. The EUR is likely to appreciate slightly against the USD in 2024 as the economic situation and monetary policy in the US and Europe are expected to converge and interest rate differentials to narrow. However, the European economy is generally weak, it is difficult to determine how much of a delay in cutting interest rates compared to the United States, and Europe may also face the risk of deteriorating terms of trade. Of course, with inflation rising, the nominal interest rate in the euro area has turned positive, which is a big change, and some of the funds that flowed out before have flowed back last year and may continue to flow back this year, so this has some support for the euro. The main situation for the yen is that there will be some fluctuations in the first quarter, and it is even possible to return to 150 against the dollar, but after that the situation will be more obvious, and it is expected to rise to 130 against the dollar by the end of the year.
In terms of emerging Asian economies, it is important to note that the global cycle of electronics has begun to stabilize and pick up this year, which means that exports from South Korea and Taiwan will improve significantly. Overall, the won is expected to appreciate further this year due to better exports, and currencies in economies such as Singapore, Indonesia, and Malaysia are likely to appreciate slightly against the dollar, meaning that the dollar will depreciate slightly against the currencies of these emerging markets, even though they are expected to cut interest rates.
In short, although the US dollar will not depreciate too significantly against the euro, it may still depreciate to varying degrees against other trading partners, especially the yen. There are also two currencies that are also important trading partners for us, the Australian dollar and the Canadian dollar, and in this regard, we expect the US dollar to depreciate by around 5% against the Australian dollar and the Canadian dollar. In such a context, the RMB is expected to reach 7 against the US dollar by the end of the year, but it may be between 7.2~7.3 in the first quarter, because there is great uncertainty in the US dollar. In addition, China's economy may still be in the process of bottoming out in the first quarter, and expectations are unstable, so there will still be some depreciation pressure on the RMB during this period.
4. Risk factors
There are two aspects of risk factors: domestic and foreign.
The biggest risk in the country is whether real estate can stabilize. If the real estate sector fails to stabilize in the first half of the year, the pressure on the RMB exchange rate to depreciate will be even greater, and economic growth will certainly not reach the level mentioned above. If real estate does not stabilize, economic growth may not even reach 3%. In this case, expectations for the Chinese market and interest rates will change significantly, and it is likely that the RMB will depreciate more against the US dollar, possibly reaching the level of 7.5 by the end of the year.
There are two aspects of the risk situation abroad. First, there may be some changes in the timing of the Fed's rate cuts, but this has little impact. Because once the market forms an expectation that the Fed will start cutting interest rates, then how much the Fed will cut interest rates and when it will start to cut will not have such a big impact on the yield of the US 10-year Treasury bonds, of course, the exchange rate will fluctuate greatly in the first quarter and the first half of the year.
Second, the risk point mainly comes from the US election, and the main risk is that Trump's re-election may bring great uncertainty to the international economy, geopolitics and the dollar. On the one hand, Trump's economic policy can be seen to be bearish and positive for the dollar: First, the extension of previous tax cuts will widen the US fiscal deficit. The expansion of US Treasury issuance will push up Treasury yields and interest rates, which will be positive for the dollar, but at the same time, it may use political pressure to pressure the Fed to cut interest rates faster, and if it cuts interest rates sooner, it will be bearish for the dollar. On the other hand, it will have an impact on the major trading partners of the United States, and if Trump is elected, he will impose tariffs across the board, affecting the eurozone, China, and South Korea. In addition, support for Ukraine may be reduced, and there will be new developments in the Russia-Ukraine conflict, which may not be very beneficial to the eurozone. From the perspective of the foreign exchange market, whether it is the foreign exchange market, the stock market, or interest rates, there is no risk of Trump's election at present, but from the perspective of long-term indicators in the market, Trump's election at the end of the year or even later will have a greater disturbance to the foreign exchange market. Now it is difficult to tell exactly what direction it is.
Finally, I believe that if the mainland's macro policies, especially monetary policy, can make greater efforts to stabilize growth, the recovery of confidence by this expectation will be far greater than the impact of 10, 20, 30, and 40 points on the RMB exchange rate itself.
(This article represents the author's views only and does not represent the position of the forum.) ）
Text arrangement: Li Chaodi, responsible editor: Zhang Keke