The Intelligence Report

07 Mar 2017

Once again, the United States is front and centre stage. Trump’s presidency marks a potentially major transition for the US and the surrounding world, the nature of which is still somewhat unclear, and the implications hotly debated. This week, the world’s attention was focused on what US President Trump might say in his first congressional address on Tuesday 28th February. As already widely commented, his speech highlighted his major policy initiatives but remained short of details. Whilst Trump was predictably “tough on trade”, we still do not know much more about his specific plans to boost US net exports. China has been singled out for criticism, and the threat of protectionist measures against China in particular remains high, although we still need to wait to see what form any measures will take.

Meanwhile China continues to go through its own major transition, balancing the policy goals of structural reform, economic liberalisation and financial market reform against an environment of structurally slowing growth. On February 20th, the People’s Bank of China (PBOC) announced the second adjustment to its Foreign Exchange (FX) regime in the past eighteen months. The first adjustment, in August 2015, triggered a round of intense global risk aversion. This time around, the PBOC’s change has garnered little foreign attention, and few ripples in global markets.

Chi Lo examines the recent announcement in more detail, placing it in the context of the FX basket changes in December, and making some interesting observations about the differences between managing an FX regime in an environment of capital outflows compared to a devaluation policy aimed at boosting net trade, a distinction all the more relevant given the concerns about President Trump’s pronouncements on trade in general, and China in particular.

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