Macquarie: Arbitrage Exit May Push CNY/USD to 5

Macquarie Group stated that if Chinese companies unwind their substantial U.S. dollar positions, triggering a sharp reversal in capital flows, the onshore renminbi exchange rate against the U.S. dollar could rise to levels as low as 6 or even 5.

Macquarie estimates that Chinese companies currently hold about 800 billion U.S. dollars of U.S. currency positions, a considerable portion of which stems from carry trade—that is, borrowing in low-yielding currencies and investing in high-yielding assets.

Macquarie economists, including Larry Hu, pointed out in their report that the current appreciation of the renminbi is not primarily due to improvements in China's fundamentals. As long as domestic demand remains weak and exports maintain resilience, the strengthening of the renminbi is more likely a result of a broad weakening of the U.S. dollar, rather than a strengthening of China's economy itself.

The report analyzed that if exports show a decline, and the government increases the intensity of stimulus measures, the actions of Chinese companies in unwinding their U.S. dollar carry positions could trigger a rapid appreciation of the renminbi. At this time, the drivers of the renminbi would shift from being predominantly influenced by the movements of the U.S. dollar to being supported by domestic demand, policy stimulus, and corporate confidence.

This judgment emerges as Chinese companies have accelerated their foreign exchange settlements since the end of last year, driving the renminbi past the 7 mark against the U.S. dollar stronger than expected. In the context of the U.S. dollar strengthening as a whole due to the situation in the Middle East over the past three months, the renminbi has also performed significantly stronger than other Asian currencies.

Macquarie economists stated in their report:

“If strong stimulus measures are introduced in China and effectively boost domestic demand, with improvements in business confidence and narrowing of the China-U.S. interest rate differential, the carry trade in renminbi will gradually be unwound, which will drive a stronger appreciation of the renminbi against the U.S. dollar.”

According to Macquarie's framework, subsequent variables focus on export performance, government stimulus intensity, and whether corporate U.S. dollar positions continue to be unwound. If these conditions occur simultaneously, the drivers of renminbi appreciation may shift from external U.S. dollar trends to domestic capital flows and changes in corporate confidence.