EFTA01459680.pdf

Deutsche Bank Asset Management: For registered representative Research and institutional client use. Wealth Management: For individual investor use. Asia Economics China 15 January 2016 Pot°, Chief Economist Global Economic Perspectives 1.11212 250.7352 petec.hoopecgOb.com China's evolving FX policy SpenCel, Ph 0 Chief Economist 1.852) 22038303 [email protected] • Our annual Access China conference this week was dominated by concern lot >ton Slok about the RMB as an unprecedented devaluation in August and rapid depreciation in recent weeks raised concerns that the authorities could not Chief Economist - or did not want to - restore stability to the currency's value. 1..1) 212 250-2165 [email protected] • We see recent events as unanticipated (at least, to us) transitional stages in the progression to an eventual goal of having a freely floating exchange Mark rate. Managing the value of the RMB against a basket of currencies, if that Chief Economist is what the PBOC is doing, implies a limitation on monetary policy 1+44120 754-52087 independence that we think policymakers eventually will resolve by [email protected] introducing further genuine flexibility. Maittrmv I wraith, Pli • Most capital outflows over the past year appear to have gone towards Economist repaying foreign debts. As those debt reducing flows taper off later this 1.44120 754-73288 year, it will be safer to allow more flexibility. In the interim, a narrowing matthew.luzzetti@dboom interest rate differential versus the USD will likely continue to pressure the currency and/or foreign exchange reserves. a Ultimately, it will be important to reassure domestic investors that they will earn a competitive return on their investments in China rather than converting to dollars. That will require continuing to articulate and deliver on reforms that reward private capital. March's National People's Congress and the promulgation of a new Five Year Plan could be important in this respect. [Two steps in the transition to flexibility: a devaluation and a basket Dec 31, 2014 = 100 6.70 CNN —CNY —CNY basket (rhs) 06 6.60 99 ri 00 6.50 . 101 I 6.40 003 6.30 FI. 105 104 6.20 106 6.10 107 Jan-16 Mar-16 May-16 Jul-16 Sep-15 Nov-15 Jan-16 Scarnatitithe Sara Al•Offeh Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 120297 CONFIDENTIAL SDNY_GM_00266481 EFTA01459680