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Does The TPP Increase The Chances Of RMB Devaluation?
Singapore Market Commentary | 09 October 2015
By: Louis Kent Lee
Articles (199) Profile

On 5 October 2015, a basic agreement for the US-driven Trans-Pacific Partnership (TPP) was reached, that sent a shock wave to China.

The TPP, is a Pacific Rim trade pact that the US and 11 other countries have agreed on, with the intention to eliminate trade barriers between TPP countries. Many believed that it was designed to contain China’s economic power.

We see this hurting China’s exports in the long term, casting shadows on its already slowing growth. More efforts might have to be poured in by the government to promote its One Belt One Road initiative to counter the TPP.

We opine a possibility of China being pressured to take further reforms, and a currency move would be one of the obvious policy options that could compensate for the competitiveness loss.

The TPP accounts for about 40 percent of global Gross Domestic Product. Among the 12 initial member countries, many are China’s most important trade partners.

Once approved fully, TPP members would enjoy zero tariffs for most traded goods and services, while China would still need to pay World Trade Organisation tariff rates. This will essentially weaken the competitiveness of “Made-in-China” products.

Furthermore, foreign direct investments might also be affected for China under this scenario.

Beijing will most likely be concerned about the TPP agreement as this is happening at a time when growth momentum is on decline, while progress on reforms is slow.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

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