As we learned in 2015/16 China can have a considerable effect on the global economy and financial markets, so it pays to keep on top of the macro currents there. At the moment the early signs of decelerating growth in manufacturing and trade, and a slowing of property price gains raise question marks on the outlook for China this year.
The increasing trade disputes between the US and China leading to the imposition of barriers to trade could also have a negative impact on Chinese exports. The Trump administration’s choice to enforce tariffs on imported solar panels and washing machines in late January could be the prelude of what is to follow, while a tit-for-tat approach by China could see things growing out of control. Nonetheless, an intensifying trade row between the world’s two biggest economies doesn’t appear likely at the moment.
Despite the anticipated slowdown in export growth, a 9.6% pace of expansion – should it happen – still translates into a robust reading and lends support to analysts making reference to improving global growth, which translates into increasing demand for Chinese products.
The yuan is government-controlled and usually trades in a tight range against the dollar. Numerous emerging-market governments keep close track of their currencies to stabilize them against the backdrop of economic growth that is often export or commodity dependent.
But of late, the weakness in the U.S. dollar, and the uptick in global growth as well as commodity prices have pushed the currency higher. In January alone, the yuan gained 3.4% against the dollar, which was its biggest monthly gain since April 1980, according to FactSet data.
The yuan appreciated by roughly 6 percent against the US dollar in 2017, having previously suffered a decline since mid-2015, when the government launched reforms to establish a more market-oriented central parity exchange rate mechanism.
With the speedy fall in the dollar, exporters might chase after the fast appreciating yuan trend to convert their dollar receipts into yuan. This could create a self-fulfilling cycle for the yuan to strengthen. We expect that there would be more exporters hedging their currency exposure to keep their yuan earnings stable.
Sharp gains in the yuan are also threatening China’s competitiveness, with an official business survey last week suggesting the currency’s appreciation led to a decline in big exporters’ activity last month. A rising yuan applies negative pressure on exports by making them more expensive for overseas buyers, but it is beneficial for imports, according to industry experts.
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