Independent Strategy

China – pressures of a strengthening dollar

Slowing domestic growth and deflation risks posed by a combination of weak global demand and rapid US dollar appreciation are increasing pressure on the Chinese to shift their forex regime. We expect a depreciation will be masked by a shift from a dollar-based peg to a trade-weighted index and are short yuan versus the US dollar. Such a move would complicate the People’s Bank of China’s job because surplus inflows were the major engine of money supply growth. This is why it is likely we’ll see measures to boost money supply too — such as reserve requirement ratio (RRR) and policy rate cuts — alongside any FX adjustment.

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