The real effective exchange rate of the RMB has appreciated by 10% on the producer price measure since 2016. While the divergence in profits growth suggests domestic consumption has remained solid, we believe policymakers will be less tolerant of a further rise in the trade weighted RMB as growth pressures mount in H2. The focus on curbing debt in the financial sector and on reining in unauthorised government financing is set to weigh on growth in the coming quarters. However, China is unlikely to engineer a significant depreciation of the RMB. In the current global political climate, a sharp decline in the exchange rate could be interpreted as Beijing firing the first shot of a currency war. We expect the RMB's trade-weighted appreciation to come to a halt.
RMB index peaked at 97.85 on 22 June 2018 and fell back to 93 as trade war fears were priced in. Far from depreciating the currency the authorties intervened to prevent a more rapid fall than markets would have priced in.