China’s efforts to internationalize the yuan may face a setback as volatility in the British pound and the euro is pushing the very foundation of the global monetary order into question, an economist at Bank of China Hong Kong (BOCHK) said on Wednesday.
Last Friday, the UK voted by 52% to 48% to leave the EU. As a result, the British pound plunged, global stock markets tumbled, and Prime Minister David Cameron also announced that he will resign.
The yuan fell to its weakest level against the dollar in five and a half years on Monday after the central bank fixed its mid-price at its lowest since 2010, in a response to a 2.5% rally in the dollar index at New York trading.
E Zhihuan, chief economist of BOCHK, said that “The financial markets have been the biggest casualty in the Brexit event. Forex volatility has risen steeply. We could already see individual defaults in market trading as a result of the rise of the significant pressures.”
Other economists also said that the UK’s decision to leave the EU could have significant influences on China’s exchange rate and monetary policies.
Zhu Haibin, Chief Economist of JP Morgan China, said in a note that Brexit was a major shock to the global financial market and economy, adding that “the event will lead to more volatility in the global foreign exchange market, and the central bank may have to fine-tune its foreign exchange policy to avoid sharp exchange rate fluctuations.”