The Exchange Rates
Since 2015, China’s benchmark lending rates have been cut five times by the central bank, fiscal policy has turned expansionary, infrastructure spending has gone up, and credit growth has accelerated. Now that newly issued money has
© Springer Nature Singapore Pte Ltd. 2017 23
Center for Macroeconomic Research of Xiamen University,
China’s Macroeconomic Outlook, Current Chinese Economic Report Series, DOI 10.1007/978-981-10-3280-6_2
Fig. 2.1 Assumptions on growth rates in the US and the euro area. Seasonally adjusted QoQ. Note EAGDP_C denotes real growth rate in the euro area, and USGDP_C denotes real GDP growth rate in the US. Source CQMM team assumptions
increased distinctively, RMB has to bear depreciation pressures. When RMB depreciation triggered notable capital outflows after August, 2015, the intensification of China’s capital control subsequently stabilized the RMB. However, though the capital outflows have been slowed, the long-term RMB depreciation expectations remain. The RMB exchange rate is expected to be down to 6.75 yuan and 7.1 yuan against the dollar at the end of 2016 and 2017 respectively.
Given its stance of easing monetary policy and the uncertainty enforced by the UK referendum, the European Central Bank is expected to boost the euro area economy via weak euro. In the meantime, the upward trend in the US economic growth helps to form dollar appreciation expectations. In the second half of 2016, the euro would continue depreciating. The euro is expected to be at 1.08 dollars at the end of 2016 and 1.06 dollars at the end of 2017 respectively (see Fig. 2.2).
Growth Rate of the Broad Money Supply (M2)
China’s M2 growth were up by 13.4 and 11.8% in the first and second quarter of 2016 respectively. Given various downward pressures on the economy, in order to meet expectations of China’s GDP growth, the central bank is expected to expand the money supply by making one cut in interest rates and one cut in reserve
Fig. 2.2 Assumptions on exchange rates changes. YoY. Source CQMM team assumptions
Fig. 2.3 Assumptions on M2 growth rates. YoY. Source CQMM team assumptions
requirement ratio. The growth rate of M2 in 2016 is assumed to be at 12.5%. On account of the current large base of M2, which is more than one time over the GDP, and China’s central bank is actively trying other ways to increase the social funds, the M2 growth in 2017 is expected to sustain stable at 12% (see Fig. 2.3).