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More flexible exchange rate seen for China, Bank Sarasin forecasts
China will take further steps to a more flexible exchange rate in 2013, according to Bank Sarasin, noting that in the long term, investors should expect significant volatility in the Chinese currency.
The Asset 21 Aug 2012
China will take further steps to a more flexible exchange rate in 2013, according to Bank Sarasin, noting that in the long term, investors should expect significant volatility in the Chinese currency. Anchoring a two- sided exchange rate risk is in the interests of that country’s central bank since a one-way bet would lead to speculative inflows and a potential bubble, it adds.
 
Since May, China’s foreign reserves have fallen by about US$90 billion as the People’s Bank of China (PBoC) defended the currency (see chart). “If the PBoC had not taken this action, the renminbi would have fallen even lower. The PBoC did not cause the depreciation of the RMB; the financial markets did,” the bank comments.
 
With the Chinese currency experiencing unheard of depreciation, falling about 1.3% against the USD since May, the PBoC has countered the decline, contrary to claims by US politicians, it adds.
 
Ursina Kubli, Bank Sarasin’s foreign exchange strategist comments: “This is the first renminbi depreciation we have seen since 2005, yet it would have been even steeper if the People’s Bank had not intervened. While we are going to hear more about the US-Sino currency dispute due to the US elections, the renminbi  is now at fair value.”
 
“The USD:renminbi will trade lower to the end of this year, until China’s economy experiences a soft landing and demand for the renminbi picks up again.
China’s central bank is sailing unchartered waters as it moves from controlling the speed of the renminbi’s appreciation to controlling its depreciation as it faces an unexpected development – flows out of the currency, probably caused by initial concerns about the extent to which the renminbi would fall short of its fair value,” she adds.
 

Kubli explains that as the renminbi has appreciated (about 20% over the last five years), China’s current account surplus has decreased, reaching just 3.6% of GDP in the second quarter of 2012, effectively falling by two-thirds since 2008. The International Monetary Fund’s estimate for a fair current account surplus for China is between 3% and 6% of GDP, suggesting that China’s surplus has now shrunk to fair value. The decline is partly due to economic factors as demand for Chinese exports fell in line with the global economic downturn, she says. 

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