UBS Expectations on the RMB

Wednesday, December 3, 2008 3:45
Posted in category The Big Picture
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Following the highly unusual RMB/ USD change this week, Wang Tao at UBS has issued a special brief on their move.

Without the prior written consent of UBS, I cannot post the actual file, however there were several conclusions that they put forward that I wanted to share:

we think China has very limited scope for sustained CNY depreciation against the USD in the coming year.

  • China is not facing depreciation pressure in the FX market either from capital outflows or from trade account.  China is expected to record a trade surplus in excess of 6% of GDP and see its FX reserves rise by more than  USD$300bn in 2009 even with a sharp slowdown in export growth.
  • As G3 economies fall deeper into recession and their demand drops, CNY depreciation would likely invite criticism that China is adopting a beggar-thy-neighbour type of policy, leading to possible protectionist responses from China’s major export markets.
  • CNY depreciation could also lead to a round of competitive devaluation in neighboring economies, which would result in little material gains for China.

More interesting to me though was a comment in the final paragraph:

We could see the CNY/USD rate moving toward 7.0 by end 2008, but still expect it at 6.8 at end-2009

6.8 at 2009 year end?  That would mean that they expect no gain at all in the year to come, and more importantly, my take is that they feel the SED’s efforts to get China to float its currency further will be in vain

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