By John Richardson
WE first warned in December 2011 that as China’s economic reforms accelerated, Yuan depreciation was a strong possibility.
And then in May of last year, we picked up the theme again by again suggesting that as growth in China slowed, Beijing would attempt to support the economy through boosting exports via a tactical depreciation of the Yuan.
Last October, China’s Premier Li Keqiang stressed that as economic reforms accelerated, it was vital that China continued to create enough jobs in order to maintain social stability. Despite a shrinking overall workforce, some 7m young people are graduating every year in China, and many are struggling to find meaningful, well-paid jobs.
A great way of guaranteeing job creation is to boost exports, and, of course, a weaker currency helps export competitiveness.
It important to note that our fellow blogger, Paul Hodges, has supported, encouraged and greatly added to our thinking throughout this process.
As recently as early March, however, it felt as if the main reason for the fall in the value in the Yuan against the US dollar during 2014 – and also its greater volatility – was getting rid of the speculators, who have caused so much damage to the economy.
This might well remain a motive behind the engineering of a weaker Yuan, which from the beginning of this year up until the end of last week had fallen in value against the US dollar by 3.3%
But to paraphrase Bill Clinton, it is jobs, stupid.
“After stagnating in previous years, the number of overseas buyers at the last week’s Canton Fair, the country’s main trade show for exporters, jumped 10% from a year ago,” wrote the New York Times in this 26 April article.
“One of the 24,581 exhibitors at the vast exhibition this year, Yan Xiaowei, said the fall of the Yuan had contributed to a spate of requests from interested foreign buyers for price quotes,” the newspaper added.
And, as we first warned about back in 2011, the fall in the Yuan is creating trade tensions.
“The [US] Treasury Department warned on April 15 that the decline in the Yuan’s value ‘would raise particularly serious concerns’ if it meant that China was continuing to intervene and retreating from its policy of allowing the free market to determine the exchange rate,” the NYT added in the same article.
The evidence of intervention is already there, according to this 24 April Daily Telegraph blog post. Its author writes that:
- The US Treasury’s currency report for April accused China of trying to “impede” the market by boosting foreign reserves by $510bn last year to $3.8 trillion – “excessive by any measure”. It also gave a strong hint that China is disguising its reserve accumulation.
- Simon Derrick from BNY Mellon said a recent buying spree of US Treasuries and agency debt by Belgium of all places looks like a Chinese front. Holdings by entities in Belgium have jumped to $341bn from $169bn last August.
- Hans Redeker from Morgan Stanley says China seems to have adopted a “beggar thy neighbour policy” to counter the slowdown at home and soak up excess manufacturing capacity.
- Albert Edwards from Societe Generale said that China is “sliding inexorably towards deflation”. Factory gate prices have been falling for 25 months in a row.
Chemicals companies have had plenty of time to prepare for this deflationary spiral. An important question to ask is: Have they prepared?