China to Feel Brexit Effects: JP Morgan

K J M Varma/Beijing
China to Feel Brexit Effects: JP Morgan

China's central bank may have to fine-tune its foreign exchange policy as its currency would weaken following Britain's decision to leave the European Union, a senior J P Morgan economist has forecast.

J P Morgan China Chief Economist Zhu Haibin in a research note said Brexit could have important implications on the country's exchange rate and monetary policies.

"Brexit was a major shock to the global financial market and economy with its full impact still unfolding," Zhu said.

It will lead to more volatility in the global foreign exchange market, and to avoid sharp exchange rate fluctuations the Chinese central bank may have to fine-tune its foreign exchange policy as it maintains the current market-based exchange rate regime, Zhu said.

He forecast that the exchange rate of the yuan would weaken to 6.75 against one US dollar by the end of 2016, but said this is more likely to be driven by a strong dollar rather than the depreciation of the yuan, which is already experiencing fluctuations after nearly four per cent devaluations last year.

After Brexit, as major economies favour additional monetary easing or slower pace in monetary policy normalisation, China's monetary policy will stay neutral rather than shift towards tightening, Zhu said.

China's monetary policy could have a slight easing bias if the macro economic situation weakens again, the economist predicted, state-run Xinhua news agency reported.

China has the world's largest foreign exchange reserves. Its foreign-currency holdings rose to USD 3.213 trillion at the end of March.

In trade terms, it's unlikely that China will face any serious direct headwinds from Brexit and the indirect impact, by economic slowdown in Britain and the European Union, could be offset by the two sides' seeking closer trade relationship with China and the rest of the world, Zhu said.


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