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China's Economy: Between a Rock and a Hard Place

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by , 07-13-2016 at 06:05 PM (596 Views)
      
   
Foreign Exchange post-Brexit Vote

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The RMB has depreciated ~8% from ~6.2 to ~6.7 RMB/USD in one year, weakest since Oct 2010. The risk of a resumption of capital outflows driven by expectations of near-term RMB weakening is therefore rising. The official FX reserve figures of over $3.1 trillion overstate the amount of ammunition available to defend the RMB, as $1 trillion or more of these reserves may be encumbered through forward and futures interventions. (When selling FX forward to stop the RMB weakening, one will have to deliver the FX at a future date. So we need to subtract that the future FX delivery from the current stock of reserves.)

The strengthening of the US dollar in response to the Brexit vote on June 23rd puts further pressure on the RMB. The key advanced industrial regions of the world (North America, the EU and Japan) are unlikely to match last year’s growth this year as a result of rising policy uncertainty including the political tensions and banking sector weakness in Europe and the forthcoming US elections.

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