china yuan is a bigger headache for the global economy than the gbp

china yuan is a bigger headache for the global economy than the gbp

Kotak Commodity Services Ltd

China Foreign Ministry said the Yuan exchange rate was not the reason for unbalanced trade ties with the United States, after Republican presidential candidate Donald Trump said he would label Beijing a currency manipulator. Trump, the presumptive Republican nominee, has called China the "grand master" of currency devaluation, which he says unfair trade deals and cost American jobs. The Yuan is currently hovering near a 5-1/2-year low against the dollar. Currency analyst also argued that the Yuan’s fall will be a bigger headache for the global economy than the British pounds, GBP/USD, slump 1.3415 on Thursday.
Sterling hit a fresh 30-year low against the dollar on Monday; one of the reasons behind the same is China’s status as the world’s biggest exporter. WTO member countries that buy a lot of Chinese goods, like the India, U.S. and Japan, are importing deflation on the back of cheaper import prices, thereby dampening their inflation. That is a huge problem for Japan, which is already resorting to unconventional tools like negative interest rates to resuscitate its economy. For the U.S., it will pose more challenges for the Federal Reserve which is trying to juggle an economic recovery at home with a prolonged global slowdown.
Given its limited exposure to Europe, China should have been well-positioned to weather the upheaval after British voters dramatically decided to quit the European Union last week. But China is finding itself at the centre of currency market volatility as renewed strength in the U.S. dollar stoked expectations for a sharp depreciation in the Yuan. The direct shock to the economy from any weakness in the U.K. should be small, said Julian Evans-Pritchard, Capital Economics’ China economist, in a note. Perhaps of greater importance are the implications for China’s currency.
The Yuan has already been in a steady decline against the greenback in the wake of the Chinese government’s surprise devaluation of the currency in August, when the stock market lost more than 30% of its value in a month. However, the pace of the Yuan’s drop could accelerate going forward as investors shy away from bets on risky currencies and flock to the greenback. In the aftermath of Brexit, dollar strength will likely rise as investors opt for low-risk assets.
In response, we think the People’s Bank of China will have to allow a faster depreciation of the Yuan against the dollar to preserve export competitiveness, said Helen Qiao, Bank of America Merrill Lynch, in a report. The economist also lowered China’s gross domestic product growth target this year to 6.4% from 6.6%, citing tighter liquidity on the softer Yuan. Trade-reliant economies, like China, often resort to weakening their currencies in a bid to make their exports cheaper and prop up the economy.
But in China’s case, the Yuan’s retreat could trigger another bout of capital flight and lead to unstable financial conditions at home. If the dollar gains against the Yuan, prompted Chinese companies to repay outstanding dollar-denominated debt, which aggravated the country’s capital outflows. Financial authorities then responded by allowing a rapid expansion in domestic credit.

Kotak Commodity Services Ltd

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