15 January 2016 Global Economic Perspectives: China's evolving FX policy record in 04 - these outflows could potentially imply less pressure on the RMB in the months to come. While China has enough foreign exchange reserves to pay off all external debt twice over, as is often noted its reserves level relative to the domestic deposit base is less impressive at 16%. But households in China don't seem to view currency risk with particular alarm. While only 2014 data are available on the breakdown of foreign currency deposits, in that year as the RMB depreciated slightly household foreign exchange deposits rose only USD5bn and represented less than 1% of household deposits. The possibility that investors might redenominate domestic deposits is certainly an important risk for policymakers to consider. In that event - a run on the currency - foreign exchange reserves will not be enough to defend the currency and extremely tight capital controls - tighter than China has had for some years and possibly interest rate increases would be needed. But we don't see that as a reasonable baseline scenario for China. Does China need a weaker imrrency? One reason we don't see domestic capital flight as a major concern at this point in time is that we think investors well understand that the currency's value is ultimately protected by the current account surplus. That surplus isn't as large as it once was, but at a trailing USD276bn over the past four quarters and likely to remain well above 2% of GDP in the year or two ahead the surplus remains a formidable support for the currency once external debts have been brought down to more sustainable levels. 'Figure 7: China's share of world exports 16 - 14 - 12- 10 - 6- 6- 4- 2- 0 %, 12mma 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 seinar Ple w • r end Avacn• ant External debts are finite and China has more then enough reserves to cover them. But they don't have enough to allow a significant redenomination of deposits With a current account surplus soli well above 2% of GDP... IFigure 8: DB's alternative real exchange rate for China 1351 2010.100 —BIS -0$-BEER 130 126 120 116 110 105 100 96 2010 2011 2012 2013 2014 2016 UN COMMA° t an. Otottene ant Figure 7 shows something quite astonishing to many investors: China's share of world exports continues to rise at the same rate - 0.6% a year - as it did during the pre-crisis years. It has risen much faster than that in 2015 (through August) despite the much faster appreciation of the RMB in trade-weighted terms. Page 6 ...and a rising share of world exports, China doesn'C seem uncompetitive. Deutsche Bank Securities Inc. CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0 120090 CONFIDENTIAL SDNY_GM_00266274 EFTA01459584