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Large one-off RMB devaluation: cons far outweigh the pros - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Bali) - The Asia Economics Team at Nomura takes a look at the pros and cons of a very large one-off RMB devaluation, judging that the cons far outweigh the pros.

    Key Quotes

    "Arguments in favour of a very large one-off RMB devaluation include: 1) in real effective terms, the RMB has appreciated 54% in the past decade; 2) China’s exports are weak and inflation is low; an over-reliance on domestic easing policies risks creating bigger bubbles."

    "However, we see more compelling arguments against: 1) real effective exchange rate appreciation has been associated with strong productivity gains, such that China has been gaining export market share; 2) China’s exports still have a large share of imported inputs, so the boost to GDP growth would be limited; 3) it would not support a rebalancing of GDP toward consumption; 4) it could create turmoil in Asia’s markets in a year that China is chairing the G20; 5) it could cause credit stress on FX debt; 6) it could provoke a self-fulfilling spiral of hot money outflows by residents who are still very underexposed to foreign assets; and 7) It could affect policy credibility given leadership’s comments of no devaluation and 8) there would be a risk of a protectionist backlash."
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