10:57 a.m.
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Emen .- For the signature is important to note that the People’s Bank of China has been preparing for a more market-oriented exchange rate mechanism. In fact, it coincides with other analysts that it is the first step for the release of the yuan.
Barclays indicates that the strategy of the BPC aims to facilitate the mobility of capital and exchange risk coverage among the participants of the domestic and global market. In addition, the company has stated its intention to increase the flexibility of the exchange rate.
But why do it now?
The main causes are the signature list: China’s intention that the yuan is included in the currency basket of the IMF; the expectation that the US dollar will continue to appreciate; and the decline in Chinese exports.
You can also serve as a geopolitical strategy to remind the International Monetary Fund and the United States the economic importance of China, one month before the visit of President Xi Jinping to the nation American.
How was the strategic measure?
Barclays ruled that the decision to allow the yuan to depreciate this week means a fundamental change in the currency strategy. Although Chinese exports have indeed fallen, this comes amid a soft global demand. “Until recently, trends in China’s share in global exports did not suggest a loss of competitiveness. Put differently, China’s growth is slowing mainly for structural reasons and not to have an overvalued currency, “the report said.
In addition, the depreciation of the currency can only boost growth in a limited way . The research cited by Barclays shows that a devaluation of 10% in local currency only promote an increase of 3.4% in exports and propel the GDP by 0.2 to 0.2 percentage points.
“For the impact on growth is significant that the currency would depreciate between 20% and 30%,” says the text. However, such a decision could lead the IMF to think that the yuan is not fit to enter the special drawing rights.
Can the authorities lose control over the currency?
This risk, consider signing, it remains limited. Without doubt, the search for the transformation of the Chinese economy will inevitably accompanied by renouncing political control. However, the situation has not led to that China can not control the pressures of currency depreciation.
Is the exchange rate of the yuan renminbi far from breakeven?
Barclays determined using various models of purchasing power parity, the Chinese currency is between 18% and 27% above its historical average. This situation has been developing since 2012.
However, the company believes that these metrics “exaggerate” the overvaluation of the yuan. If the cost of living in China is seen, in terms of US dollars, and compared with the US, the coin has an overvaluation of between 5% and 10%
How much can you expect the yuan to depreciate?
According to the analysis of the bank, the currency is likely to depreciate further 7% this year and be located in 6 80 yuan per dollar. This expectation is based on the Chinese authorities probably they share the idea that the devaluation of the renminbi is not the most powerful tool to stimulate growth. Instead, the government may be waiting ahead and bring down the value of the currency, coupled with a drop in reserves would stabilize capital outflows, which have been accelerating lately.
“If the renminbi is 10% more expensive but the growth trend of China remains intact in 6% -7%, then the rate of the yuan would probably be sustainable, “says the text.
What could be the global macroeconomic impact?
Barclays argues that the strong reaction of global markets to the devaluation of the yuan may have been fueled by concerns about growth in China is weaker than indicated by official statistics.
The markets, the firm may have overreacted but uncertainty remains, and is something that policymakers public, including the Federal Reserve, have in mind. If the gross domestic product of China was 200 basis points below current projections (6.8% in 2015 and 6.6% in 2016), the global expansion would be reduced from 40 to 50 basis points.
“The effects would be comparatively strong in Japan and the emerging nations of Asia, as well as some commodity-exporting regions such as Latin America.
The reaction of global financial markets to the depreciation of the yuan highlights the risks of “financial contagion” to the situation of China. “Many emerging market currencies depreciated, the bond yields of advanced economies moved down, the equity markets fell and the dollar depreciated against the euro,” describes the report.
About the impact of the measure on the decision of the Fed to raise interest rates in the United States, the company is firm in the baseline scenario that maintains that the increase will occur in September. However, they do not rule out that it can be postponed.
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