Morgan Stanley is returning to a bearish view on emerging market (EM) currencies, citing concerns over China’s growth risks that not only weigh on the renminbi but also further pressure a weak global economy.
The shift from a neutral stance resulted partly from a view change on the offshore renminbi, or CNH, where the Wall Street giant has added a short position, given expectations for growth risks to remain a focus, strategists led by Mr James Lord wrote in a note.
“CNH weakness and China macro weakness should spill over to the rest of the EM.”
Morgan Stanley is among a group of prominent peers that have recently cut forecasts for China’s 2023 economic growth, following a run of disappointing data and a lack of potent fiscal or monetary stimulus.
The renminbi has slumped nearly 6 per cent against the dollar in 2023, nearing its weakest level since 2007 despite Beijing’s ramped-up efforts to support the currency.
Asian currencies, particularly the Singapore dollar, baht, won and ringgit, look most exposed to a China growth slowdown, while EM peers including the rupee and Turkish lira may be better positioned, Morgan Stanley’s strategists wrote.
In sovereign credit, Panama, Zambia, Angola and Ecuador may have the biggest downside exposure to a weakening Chinese economy, given the trade links and how sensitive their bonds are to the offshore renminbi’s performance, according to the note.
“We are not expecting a significant rebound in sentiment towards China’s outlook in the short term,” the strategists wrote, citing low private-sector confidence, deleveraging in the property sector and longer-term issues, from debt to demographics.
Morgan Stanley is not the only Wall Street bank foreseeing renminbi weakness.
Goldman Sachs Group also expects renminbi softness to extend with weak exports, sluggish domestic consumption and deflationary pressures, according to a note written by strategists led by Mr Danny Suwanapruti.
However, the Chinese central bank’s support measures will moderate the pace of renminbi depreciation, Goldman Sachs said.
“One key market concern is whether a weaker CNY (Chinese yuan) will spur significant capital outﬂows. However, FX (foreign exchange) reserves are high, commercial banks’ external assets have been built up and the PBOC (People’s Bank of China) has tightened capital outﬂow channels.” BLOOMBERG
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