Weakening FX better than selling US debt for China: Goldman Sachs

[LONDON] China would be better off weakening its currency rather than selling its vast holdings of US government debt in response to a growing trade conflict between the world's two biggest economies, according to simulations by Goldman Sachs strategists.

The US 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 US dollar on Tuesday. So far this month it has fallen 2.34 per cent against the US dollar, more than a shock near two per cent devaluation against the greenback in August 2015.

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

That would be far more acceptable than winding down its US$1.8 trillion holding of US debt which would lead to a tightening of financial conditions in the US 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 per cent against the US dollar, more than a shock near two per cent devaluation against the greenback in August 2015.

REUTERS