Features

Prepare for a stormy summer for China's economy

A sliding currency, weakening stockmarket and the threat of a trade war with the US spell trouble for China's economy.

906_MW_P04_Markets
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.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Robin Geffen: dividend cuts aren't all down to Covid
Stockmarkets

Robin Geffen: dividend cuts aren't all down to Covid

The seeds of recent dividend cuts and cancellations were sowed many years ago, says veteran investor Robin Geffen.
25 Oct 2020
Dividend payments will take a long time to recover
Income investing

Dividend payments will take a long time to recover

Companies are gradually resuming dividend payouts, but we can expect only a modest rebound in 2021, says Cris Sholto Heaton.
25 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020