International Communique No. 199 – CHINA DOESN’T WANT A WEAK YUAN

//International Communique No. 199 – CHINA DOESN’T WANT A WEAK YUAN

International Communique No. 199 – CHINA DOESN’T WANT A WEAK YUAN

2019-07-19T04:01:44+10:00June 18th, 2019|

China’s latest industrial-production stat fell short of estimates, rising by only 5% compared with the 5.4% growth rate expected. That also marked the slowest increase in the past 17 years. To counter the economic slowdown resulting from its trade tiff with the US, the Chinese government plans to start investing in infrastructure again while supporting provincial governments financially so that they can in turn embark on huge development projects.

The yuan is down by more than 3.5% against the dollar since the tariff war began. Usually, a weaker currency would be a boon for exporters, but the Chinese government does not see things in the same light, having already threatened speculators that any attempt to short the yuan would expose them to huge losses. Stability in the currency is of paramount importance to the government as a sharp downtrend in the yuan would encourage capital flight. Additionally, Beijing has made no secret that it wants to see its currency acquiring reserve-currency status. Yuan stability is therefore a long-term goal that takes precedence over any short-term advantage that a weaker currency could secure for China’s exports.

The Trump administrations trade tariffs are starting to have an impact not only on Chinese but also on US firms. More than 600 US companies, including majors such as Walmart (the world’s leading retailer), have written to their government to criticise the levying of these duties and highlight the damage being done to their businesses. Walmart is also the largest private-sector employer in the US. It estimates that all further customs duties could endanger close to 2 million jobs in the country. It has also calculated that the customs duties will cost the average family-of-four some $2,400 every year. The pressure is mounting on President Trump ahead of next year’s election.

Accommodative talk from central banks continues to support equity markets. The bond market now puts the probability of a Fed rate cut at 88% by the end of July. However, Fed chief Jerome Powell is likely to keep his rate-cutting powder dry so that he does not run out of ammunition too soon, should the US economy one day really need a bout of monetary stimulus.

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