2017.05.2501:19:00UTC+00Yuan Likely to Remain Relatively steady in the Months Ahead, says Scotiabank

The yuan is expected to remain relatively steady in the months ahead, while other EM Asian currencies could see continued portfolio inflows as long as US political turmoil stabilises. In addition, China’s onshore yuan liquidity conditions will likely turn more volatile and tighten next month by taking into account the central bank’s MPA assessment approaching the half-year end.

China’s economic growth may face more headwinds in the second half, sparking risk aversion at some point late this year. Moreover, S&P Global Ratings has changed its outlook for China to negative since March 31, 2016. It would dampen market sentiment should S&P decide to follow suit in the near-term. S&P currently rates China one notch above Moody's and Fitch.

Moody's Investors Service on Wednesday downgraded China's long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3 on concerns over a slowing economy and growing debt. It is the first time that Moody's has cut its investors ratings on Chinese sovereign debt since November 1989.

Earlier on April 9, 2013, Fitch Ratings downgraded China’s long-term local currency rating to A+ from AA-, the first sovereign rating cut since 1999. Moody’s also changed its outlook on China to stable from negative after revising the outlook to negative from stable in March 2016.

Meanwhile, Moody’s said in a statement that structural reforms effectively stemming the rise in leverage without an increase in risks in the banking and shadow banking sectors could be positive for China's credit profile and rating, while warning that leverage continuing to rise faster and to involve significant misallocation of capital would spark negative rating pressure.

In addition, China's finance ministry said the downgrade by Moody’s was based on an "inappropriate method" and the rating agency was exaggerating the mainland's economic difficulties while underestimating the government’s reform efforts.

"We saw knee-jerk declines in China’s stocks and offshore CNH, but the overall impact was limited. China’s 5Y USD CDS premium was up 1.5 bp only. China will continue the process of financial deleveraging while preventing systemic financial risks as the nation has pledged to stick to the basic tone of “seeking progress while maintaining stability” this year," Scotiabank commented in its latest research report.