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RMB upside limited, hot money to peak
Economics China
17 June 2008
Isaac Meng, CFA
BNP Paribas Equities (Asia) Ltd
Beijing Representative Office
(86 10) 6561 1118
isaac.y.meng@asia.bnpparibas.com
China macro risks are increasing as the growth outlook weakens;
inflationary pressure persists despite massive energy subsidies, price
controls and continuous sharp adjustment of asset prices. Peaking
exports, the trade surplus, inflation and concern over hot money inflows
should limit RMB upside.
We reiterate our view that China macro risks are increasing due to a
deteriorating growth outlook and inflationary pressure despite massive
energy subsidies, price controls and a continuous sharp adjustment of asset
prices.
Specifically, on the RMB exchange rate, we disagree with our competitors’
view that fast appreciation of the RMB is part of the solution; rather, we
believe the RMB outlook should reflect and be influenced by fundamentals.
Below, I outline the fundamentals and policy reasons why RMB appreciation
should slow in the remainder of 2008, or even reverse into slight
depreciation in 2009-10.
Both China’s ratio of net exports to GDP and export growth peaked in 2007
and continued to weaken in 2008. The net export/GDP ratio in 1Q08
dropped to 4.7ppt from 9.2ppt in 3Q07. When the net export/GDP ratio
peaks, the RMB rate peak is also close, especially for nominal exchange
rates. This is not only fundamental economics, but also reflects policy
makers’ concern that employment is at risk.
High energy commodities prices are hurting China badly, not only shrinking
the trade balance through worsening terms of trade, but also compounding
inflationary pressure. Without energy subsidies, inflation would already be in
the double digits; however, phasing out energy subsidies could cause
further macro risks as played out in other weaker emerging Asian
economies.
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