Morgan Stanley cut its forecast for the yuan on Monday, becoming the second of the world's big banks to do so in recent days in response to strong capital outflows and growing concern over China's economy and financial markets. Meanwhile, credit ratings agency Fitch said outflows since the second quarter of 2014 has likely topped $1 trillion.
A slump in Chinese stocks this year has triggered extreme volatility across global markets. A weaker yuan is seen as one of the policies Beijing is likely to use to make sure an economic slowdown doesn't turn into a damaging hard landing. "While policymakers are still trying to maintain the trade-weighted (yuan) exchange rate in a stable range, we now anticipate that they will transition towards targeting a depreciation in the NEER (nominal effective exchange rate) about two quarters earlier than initially expected," Morgan Stanley said in a note. "This move will help policymakers to still cut interest rates to manage deflationary pressures, but will imply further depreciation of the yuan (against the dollar)."
Morgan Stanley revised its end-2016 dollar/yuan forecast to 6.98 from 6.80, and its end-2017 forecast to 7.31 from 7.07. The US bank now reckons Beijing will start to transition towards a depreciating NEER in the third quarter of this year, or perhaps earlier if there's no let up in capital outflows and market volatility. On Friday Goldman Sachs raised its 12-month forecast to 7.00 from 6.60, and its end-2017 call to 7.30 from 6.80. The yuan has fallen 1.5 percent since the start of 2016 to its lowest against the dollar in over four years, a relatively large fall that has raised alarm among some rivals that China was risking a bout of competitive devaluations.