China’s central bank has already responded to the shock results of the British referendum by pledging to maintain basic stability in the yuan and sufficient liquidity within Chinese financial markets. The impact on China from the result will be contingent upon the extent of US dollar strength, which also depends upon the degree of uncertainty surrounding subsequent political decisions in Europe. Sustained US dollar strength will focus market attention on the extent of depreciation that will be permitted within a trade-weighted basket-driven regime, as well as the potential risk of a more decisive break from the current pattern of exchange rate management.
