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China Opts Against Weak RMB to Boost Growth

China Opts Against Weak RMB to Boost Growth

(9 July 2018 - China) China will not use the significant depreciation of the RMB as a weapon in its escalating ‘trade war’ with the US on tariffs. 

The Yuan exhibited significant volatility in June, falling over three percent against the USD to record its worst monthly decline since Beijing set up an FX market in 1994. As the latest US tariffs on a broad basket of Chinese imports came into effect the RMB rebounded against the US dollar last week. Chinese authorities prefer a stable currency that would help facilitate internal reform and economic transformation, in addition to ensuring a smooth relationship with the euro zone, Japan and emerging economies.

The PBOC, which is the primary agency overseeing the yuan exchange rate, did not want to facilitate a rapid deprecation given a sharply weaker Yuan would not only undermine domestic purchasing power and consumer sentiment in China, but also pose significant risk to the country's debt laden property market. Net exports contributed only 0.7 percentage points to overall growth contributed by the Chinese economy last year. Its contribution is eclipsed by the shadow economy which is a major focus for regulators and officials. Total yuan deposits in Hong Kong stood at almost 600 billion yuan at the end of May 2018, a significant decrease from 994 billion yuan in July 2015 when the PBoC devalued the currency by two percent.

"There is no possibility of significant depreciation. The Yuan is likely to get stronger in the future. The Yuan's decline was likely to be temporary as the country's economic fundamentals pointed to a stronger currency in the longer term. In recent years, some international punters have tried to earn big profits by shorting the Yuan. The facts proved they had made serious misjudgement over the situation" Party Secretary of the People's Bank of China (PBoC) Guo Shuqing stated.

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