June 26, 2018 / 9:36 AM / 2 months ago

Weakening FX better than selling U.S. debt for China - GS

LONDON (Reuters) - China would be better off weakening its currency rather than selling its vast holdings of U.S. government debt in response to a growing trade conflict between the world’s two biggest economies, according to simulations by Goldman Sachs strategists.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

The U.S. bank is among the first major banks to explicitly spell out the likelihood of renminbi weakness as a response to a growing trade conflict.

The Chinese currency traded overseas fell to a six-month low against the dollar on Tuesday. So far this month it has fallen 2.34 percent against the dollar, more than a shock near 2 percent devaluation against the greenback in August 2015.

Economists at the bank led by Jan Hatzius forecast that a five percent depreciation in its currency would boost its growth by 0.4 percent.

That would be far more acceptable than winding down its $1.8 trillion holding of U.S. debt which would lead to a tightening of financial conditions in the U.S. by as much as 0.1 percentage point and have a spillover effect into other economies such as Canada and Mexico.

“These simulations suggest that China is better off by weakening its currency than selling US assets, which is one reason why we believe abrupt sales of Chinese Treasury holdings are quite unlikely,” they said in a note.

The Chinese currency traded overseas fell to a six-month low against the dollar on Tuesday. So far this month it has fallen 2.34 percent against the dollar, more than a shock near 2 percent devaluation against the greenback in August 2015.

Reporting by Saikat Chatterjee; Editing by Keith Weir

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below