BNP Paribas – China Fighting Back

  • PBoC’s effective 2% devaluation of the CNY today represents a long overdue, albeit partial, fightback in the global currency wars that have sapped China’s competitiveness.

  • With recent data confirming export stagnation in the first seven months of the year and imminent Fed lift off likely to see renewed USD strength, the tipping point had been reached.

  • Macro-economic necessity has once again prompted welcome, but long-delayed, structural reform with PBoC signalling that its daily fixing will be more market orientated in future.

  • If correct, this opens up scope for further modest depreciation vs. the USD although China’s huge FX reserves mean that the authorities ultimately retain control of the ‘spot’ rate.

  • Compared to the CNY’s 15% real appreciation over the last year, today’s move is nothing more than a partial salve but helps limit downside risks to China’s export/industrial sector.

  • Increased FX flexibility critically helps ease the ‘trilemma’ facing Chinese policymakers and increases room both for lower CNY & for lower domestic rates as US rates move up.


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