J.P. Morgan Says the Yuan Is 20%-30% Undervalued, but the Cause Remains Disputed
J.P.
J.P. Morgan’s analysis of the renminbi valuation debate says there is broad agreement that the yuan is 20%-30% undervalued. The disagreement centers on the cause: whether it reflects exchange-rate management or domestic policy.
The research says the valuation gap should not be explained by inflation differentials, with China experiencing deflation while the rest of the world faces inflation. Actual price dynamics do not match the theory.
J.P. Morgan concludes that fiscal expansion is unlikely to significantly reduce China’s dependence on exports. The yuan is expected to appreciate modestly, but not in a sustained reversal of its direction. Exports will remain the main engine of demand.
In the note’s assessment, the outlook is positive for export-oriented companies because the impact of a modest yuan appreciation should be manageable, and negative for import-dependent industries. Some expectations for yuan appreciation are already priced into the market, but the scale and pace of any appreciation remain highly uncertain.
Catalysts include the strength and effectiveness of China’s fiscal expansion, changes in the China-U.S. interest-rate differential, and export data. Key indicators to watch are the yuan’s exchange rate, export growth and changes in foreign-exchange reserves.
The research says the valuation gap should not be explained by inflation differentials, with China experiencing deflation while the rest of the world faces inflation. Actual price dynamics do not match the theory.
J.P. Morgan concludes that fiscal expansion is unlikely to significantly reduce China’s dependence on exports. The yuan is expected to appreciate modestly, but not in a sustained reversal of its direction. Exports will remain the main engine of demand.
In the note’s assessment, the outlook is positive for export-oriented companies because the impact of a modest yuan appreciation should be manageable, and negative for import-dependent industries. Some expectations for yuan appreciation are already priced into the market, but the scale and pace of any appreciation remain highly uncertain.
Catalysts include the strength and effectiveness of China’s fiscal expansion, changes in the China-U.S. interest-rate differential, and export data. Key indicators to watch are the yuan’s exchange rate, export growth and changes in foreign-exchange reserves.