China Economy

China's yuan 'may already be overvalued' and is set to move lower, Nomura says

Key Points
  • The Chinese yuan may "already be overvalued" against the U.S. dollar and will likely move lower, Japanese financial firm Nomura says.
  • The United States reportedly wants to mandate a "stable" yuan as part of a deal to end its trade war with China — but Nomura says that strategy is "neither sensible nor practical."
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The Chinese yuan is probably already overvalued against the U.S. dollar and any efforts by President Donald Trump's team to lock in that level as part of trade negotiations will likely backfire, according to Japanese financial firm Nomura.

The yuan has long been a sticking point for the U.S., which, despite years of long-term appreciation in the currency, accuses Beijing of keeping it artificially undervalued to boost exports. Washington has reportedly pressed Chinese officials to maintain currency stability amid trade talks.

Despite that request, Nomura said the American side appears to have it all wrong.

"We believe (the) yuan may already be overvalued against (the dollar), and China's latest round of monetary and credit easing may push (the yuan) further into overvalued territory," Nomura said in a Monday note, referring to the country's efforts to put a floor under slowing growth in the world's second-largest economy.

In fact, attempts to stabilize the rate "could result in an increasingly overvalued yuan, slower export growth, elevated import growth and worsening current account deficits in China," the Japanese firm said.

Nomura said it ultimately expects the yuan to move lower against the dollar "in the medium to long term," though it did not suggest any levels or ranges.

US request for yuan stability is 'odd,' says investor
US request for yuan stability is 'odd,' says investor

That analysis comes after People's Bank of China Governor Yi Gang addressed currency policy at a Sunday press conference during the ongoing National People's Congress annual legislative session.

Yi expressed the view that China planned to increase flexibility in how it manages the tightly controlled yuan and described trading last year against the dollar as "quite stable," Nomura said.

Under pressure from a slowing economy and the trade war, the Chinese currency has repeatedly tested 7 yuan to the dollar.

But it has strengthened off those lows amid soaring domestic stock markets and rising optimism over a possible resolution to the ongoing tariff conflict between the world's two largest economies. As of Monday, the currency traded at about 6.72 to the dollar.

The currency is fixed daily by Chinese authorities against the U.S. dollar at a midpoint from which it can move as much as 2 percent in either direction. But market forces play a role and China is keen to keep a lid on money flowing out of the country.

Nomura said that injecting any kind of formal language on the stability of the yuan into a trade deal would be an attempt to keep China from devaluing the currency and to curb "excessive interventions" in it.

"In our view, a clause pressuring China to maintain a 'stable' yuan is neither sensible nor practical," Nomura said.

"China is unlikely to hamstring itself with absolute compliance to such a policy, as it will let market forces play the determinate role in its FX markets," it added.

Other analysts have noted that the U.S. demands for a stable yuan are "superfluous" on their surface because China's central bank ultimately wants the same thing in order to entice international investors.