FX Primus Ltd.

FX Primus Ltd.

March 05, 2014 01:38 ET

FXPRIMUS Market Brief of the Week: The Depreciation of the RMB Reflects the People Bank of China's (PBOC) Policy Stance

SINGAPORE, SINGAPORE--(Marketwired - March 5, 2014) - In FXPRIMUS' Market Brief of The Week for 3 March, the brokerage firm's Senior Economist, Jimmy Zhu, looks at how the devaluation of Yuan will affect the Chinese economy.

Economic Insights

The RMB has depreciated around 1.5% for the entire month of February. If devaluation of the Yuan continues, how will this affect the Chinese economy moving forward?

In January, we wrote one article for "Bloomberg Economics" that value of the Yuan plays a key role of the Chinese economy outlook in 2014. Under that article, we stated that the economy may prefer a weaker exchange rate in near term when most of the growth engines were slowly climbing except for exports and thanks to the sound recovery of its major trading partners.

One of the main reasons for the PBOC to engineer lower exchange rate is to decelerate shadow finance activities and keep its financial market stable for a longer period of time.

  1. Lots of hot money is purely betting the RMB's one way move. Once this perception can be eliminated, the amount of inflow will be trimmed down substantially.
  1. Lower rates also push those Wealth Management Products' (WMP) yield lower. Number of Alibaba's Yuebao accounts has reached 81 million, much higher the numbers of the A share account holders at 67 million.

With the benchmark interest rate moving lower, the Yuebao's annual yield has dropped below 6% this week, aiming to reduce its popularity.

Could any central bank change its monetary policy regime this month, and what kind of opportunities investors can take advantage of?

It will definitely be the Reserve Bank of New Zealand (RBNZ). We expect the RBNZ to increase the Official Cash Rate (OCR) by 25 bps to 2.75% next week. New Zealand's economic expansion has 'considerable momentum'. Prices for New Zealand's export commodities remain very high, especially for dairy products. Consumer and business confidence are strong and the rapid rise in net inward migration over the past year has added to consumption and housing demand. Construction activity is being lifted by the Canterbury rebuild and by work in Auckland to address the housing shortage. Continued fiscal consolidation will partly offset the strength in demand. Gross Domestic Product (GDP) grew by 3.5% in the year to September, and growth is expected to continue around this rate over the coming year.

While agricultural export prices are expected to come off their peak levels, overall export demand should benefit from improving growth in the global economy. However, improvements in the major economies have required exceptional monetary accommodation and there remains uncertainty about the timing of withdrawal of this stimulus and its effects, especially on emerging market economies.

Annual Consumer Price Index (CPI) inflation was 1.6% in 2013, and forward-looking measures of firms' pricing intentions have been rising. Construction costs are increasing and risk feeding through to broader costs in the economy. At the same time, there appears to have been some moderation in the housing market in recent months. The high exchange rate continues to dampen inflation in the traded goods sector, but the Bank does not believe the current level of the exchange rate is sustainable in the long run.

While headline inflation has been moderate, inflationary pressures are expected to increase over the next two years. In this environment, there is a need to return interest rates to more-normal levels. The RBNZ expects to start this adjustment soon.

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