Monday 9 April 2018

Chinese FX deval coming up?

China runs a CA deficit with the world ex-EU and US. If as part of Trade Wars it wants to export more to these countries, or do more bilateral trade as part of OBOR, then it probably needs a cheaper REER, as CNY/CNH is highly valued on a REER basis vs these countries.

So far this year the USD has been weak and CNH roughly flat vs EUR and JPY.

Using very rough numbers China is running a $375bn surplus with the US and a $422bn number overall. Its running a EUR180bn surplus with the EU and a $175bn or so sized deficit with the rest of the world.  If it loses say $150bn of sales to the US, or over 1% of GDP, it needs to find customers elsewhere for that.

The EU and Japan are the only large economic blocks which can absorb that much in sales in the short run, and implementing OBOR and related
exports will take time.

We also still have not seen what Trump plans for the EU/ Germany which it ran a $151bn and $64bn deficit with respectively in 2017.

If they dont devalue then they need to absorb the sales internally, which involves getting the savings rate down, reinflating the credit bubble, or risking deflationary forces push prices down. One pressure release valve domestically could be to cut interest rates. PBOC rates are above inflation which is about 1.5%-2% depending on which indicator you use vs an inflation target of 3%.

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