China to feel Brexit effects: J.P. Morgan

Britain's decision to leave the European Union (Brexit) could have important implications for the country's exchange rate and monetary policies, according to a senior J.P. Morgan economist.

Brexit was a major shock to the global financial market and economy, with its full impact still unfolding, J. P. Morgan China Chief Economist Zhu Haibin said in a research note.

It will lead to more volatility in the global foreign exchange market, and to avoid sharp exchange rate fluctuations, the Chinese central bank may have to fine-tune its foreign exchange policy as it maintains the current market-based exchange rate regime, Zhu said.

He forecast that the exchange rate of the yuan would weaken to 6.75 against one U.S. dollar by the end of 2016, but said this is more likely to be driven by a strong dollar rather than the depreciation of the yuan.

After Brexit, as major economies favor additional monetary easing or slower pace in monetary policy normalization, China's monetary policy will stay neutral rather than shift towards tightening, Zhu said.

China's monetary policy could have a slight easing bias if the macro economic situation weakens again, the economist predicted.

In trade terms, it's unlikely China will face any serious direct headwinds from Brexit and the indirect impact, by economic slowdown in Britain and the European Union, could be offset by the two sides' seeking closer trade relationship with China and the rest of the world, Zhu said. Endi