China Center Chart Dive: RMB fundamentals weakened in 2016, and are likely to further deteriorate

An exchange rate is the price of one currency over another. It is fundamentally determined by demand and supply, and demand for RMB is a function of trade with China and/or investment in China. Both of these drivers weakened in 2016, as evidenced by Balance of Payment data. The current account surplus, which is a net FX inflow based on the international trading of goods and services, declined 36 percent or USD 120 billion in 2016. The decline was a result of falling exports of goods and rising imports of services. On the other hand, the balance of Foreign Direct Investment (FDI) turned negative in 2016 for the first time, as inbound FDI outpaced outbound FDI by USD 58.5 billion. The net outflow of FDI reflects the increasing attractiveness of overseas assets relative to domestic assets, both of which indicate downward pressure on the RMB. There is no foreseeable reason for the dynamic we describe to change in the short term. As such, it is reasonable to assume that the RMB will continue to be under depreciation pressure.