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Foreign Exchange

BIS analyses impact of FX on China

The Bank for International Settlements has just published a paper which it says shows, as most will have probably thought, that “China’s trade balance is sensitive to fluctuations in the real effective exchange rate of the renminbi”.

The report, China's exchange rate policy and Asian trade, adds that “exchange rate policy alone will probably not be able to address the imbalance. The potential reduction in the trade surplus resulting from an increase in the renminbi exchange rate is limited mainly because Chinese imports do not react as expected to a renminbi appreciation – they tend to fall rather than increase.”

It their conclusion, the report’s authors state that their detailed findings “raise concerns in terms of Asia’s reaction to a sudden appreciation of the renminbi, particularly if other Asian currencies also appreciate. Although this study concentrates on only the volumes of imports and exports – so the conclusions cannot be comprehensive – it does underscore the importance of investigating further potential effects from a renminbi real appreciation and different combinations of exchange rate policies in Asia.” Perhaps it’s best to leave well alone then.

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