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China’s growth may hit sub-6% level, but big yuan devaluation unlikely: UBS

In case of a full-blown trade war, they see yuan falling to 7.2 by 2019-end.|
Updated: May 15, 2019, 01.24 PM IST
NEW DELHI: Foreign brokerage UBS says the risk of a full-blown trade war between the US and China has increased, but hopes the issue will be resolved in the next couple of months without the US raising tariffs on the rest of $300 billion worth of Chinese goods.

The US has thus far slapped tariffs on $200 billion worth of Chinese exports to 25 per cent from 10 per cent. UBS expects these moves to cut China’s GDP growth by 30-40 bps in the next 12 months.

If the US moves up with its proposed hikes on rest of $300 billion goods, it may bring down China’s GDP growth by another 80-100 bps, UBS said.

“If further escalation happens in next 1-2 months, China’s GDP growth may fall below 6 per cent in 2019 even with more policy stimulus,” economist Tao Wang and his team at UBS said in a note. For now, the UBS economists have pegged China’s GDP growth at 6.2 per cent and the value of yuan or renminbi at 7 to the dollar by December-end.

In case of a full-blown trade war, they see yuan falling to 7.2 by 2019-end.

Morgan Stanley in a note projected yuan to reach 6.6 by end-2019. “A material currency depreciation, or a one-off devaluation is unlikely, as it would complicate future trade talks and add to self-fulfilling stress on outflows, leading to domestic financial conditions tightening,” it said.

UBS expects China to shift its macro policy stance to more of an easing bias again after sounding more cautious in late April.

“PBC will likely increase liquidity offering through various facilities (including 100 bps additional RRR cuts in 2019) and guide down market interest rates, though we still see no benchmark interest rate cuts. The proposed measures to promote consumption of appliances and cars may be rolled out sooner than later,” the brokerage said.

UBS in a recent note said India’s market share gains have been proportional to the share of ex-China exports to the US before the tariffs were introduced. This is similar to the trend seen over the past few years and incorporates only a marginal gain in market share accruing to India due to diversification away from China, it said.

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