Prepare for a stormy summer for China’s economy

Clouds are gathering over China

China’s currency, the renminbi, or yuan, has slipped by more than 8% since late March, and its slide appears to be gathering speed. Last Friday the currency slipped by 0.9% against the dollar, the biggest daily fall in two years. It is now at a one-year low against the greenback.

The fall reflects concern over a slowdown in the Chinese economy and a possible trade war with the US. To complicate matters further, the currency’s decline is now becoming a key issue in the trade dispute. President Donald Trump has said that the renminbi is “falling like a rock” and expressed concern over the strengthening US dollar.

He has long insisted that “China, the European Union and others have been manipulating their currencies lower” in unfair pursuit of increased exports. A weaker yuan would also magnify the effect of Chinese tariffs on US firms and alleviate the impact of the levies imposed on China.

Propping up the yuan

Not for the first time, Trump has got the wrong end of the stick. The main reason the dollar is getting stronger is his government’s fiscal stimulus, says Hamish McRae in the Evening Standard. “The tax cut was pushing the US economy to grow faster, and at the wrong time since it was already close to full capacity.” Investors therefore pencilled in higher interest rates and the dollar rose because the yield on dollar-denominated assets looked set to go up. As for China’s currency manipulation, “the yuan has been falling against the dollar and the [People’s Bank of China] has been propping it up – exactly the opposite of what Donald Trump is attacking it for”. The central bank has allowed the currency to fall in stages amid strong downward pressure.
The decline reflects trouble on the home front as well as the trade spat.

A sea of troubles

GDP grew by 6.7% year-on-year in the second quarter, but decelerations in credit and investment suggest that a sharper slowdown lies ahead, according to The Economist. China recorded a record number of bond defaults in the first half of the year. Meanwhile, the Chinese equity market has entered bear-market territory after falling by some 20% from its highs in January.

This week also brought news that the government have decided to extend corporate tax breaks originally intended for the tech sector to everyone. Officials have also “injected eyebrow-raising sums into the financial system” in recent days.

The current weakness of the Chinese currency has not led to a global market panic so far, as it did in 2015 and late early 2016. The weakening renminbi sent shock waves through Asian currency markets and stoked an equity market sell-off, say Emma Dunkley and Alice Woodhouse in the Financial Times. Now, analysts warn the renminbi could fall even more, especially if the state loosens monetary policy again despite the huge debt bubble. Markets could be in for a stormy summer.

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