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Analysis Of RMB Depreciation
- Oct 15, 2018 -

Reuters Shanghai October 15 - UBS, the world's leading investment bank, released a report saying that China's current account surplus is nearing its end, and may even turn into a small deficit in 2019, and China's introduction to the impact of hedging trade wars The stronger the easing policy, the greater the current account deficit may be; as the impact of the trade war gradually emerges, the pressure of RMB depreciation may continue to increase. How likely is the depreciation of the renminbi? Wang Tao, chief economist at UBS Greater China, expects the exchange rate of the yuan against the US dollar to be around 7.0 at the end of 2018 and 7.3 at the end of 2019. If the trade war is further escalated and the United States imposes a 25% tariff on all Chinese exports, the exchange rate of the RMB against the US dollar may approach 7.5 in 2019.


The premise of our renminbi's moderate depreciation forecast is: 1) China will not take the initiative to devalue the renminbi as a tool to deal with trade wars; 2) the central bank will continue to strictly manage the exchange rate, and strive to keep the renminbi relatively stable; 3) the opening up of domestic financial markets will increase However, capital controls will not be significantly relaxed; 4) the US dollar will not appreciate significantly from current levels.


Why is the RMB unlikely to experience significant depreciation? Although the trade war and the divergence of China-US monetary policy will naturally lead to a weakening of the RMB exchange rate, and the depreciation of the Renminbi can at least partially offset the adverse effects of the US tariff increase, we do not believe that the Chinese government will allow the RMB to depreciate sharply. More importantly, in the coming year, the government still has enough policy tools to maintain the exchange rate. We believe that the depreciation of the renminbi cannot completely offset the impact of tariffs and trade wars on the macro economy, especially considering that the increase in uncertainty in commercial activities will indirectly inhibit related investments. In addition, the depreciation of the renminbi also has certain side effects, some of which are difficult to quantify and more difficult to prepare in advance. The sharp depreciation of the renminbi will weaken market confidence and lead to a large outflow of capital, which will also push up the debt burden of some enterprises and bring them into trouble. We expect the government to continue to use the counter-cyclical adjustment factor of the mid-price pricing to stabilize the exchange rate, which can also stabilize market expectations; and strengthen capital controls when necessary to increase the cost of shorting the yuan; but it will not use as much as 2015-16. Use foreign exchange reserves to intervene in foreign exchange markets.