Economic Hard Landing In China
Will an economic hard landing in China take the Yuan down with it? China’s economy has outpaced the world for the last thirty years. After China opened itself to the West and instituted market based economic reforms in 1978 its “managed capitalism” and cheap labor attracted foreign investment. China proceeded to copy what it learned as well. With growth rates commonly in the ten percent per year range China has accumulated currency reserves of over $3 Trillion, mostly in US dollars. However, as China’s economy becomes increasingly integrated with the rest of the world it also has become more dependent on the other economies of the world. The Great Recession that started in 2008 has caused serious economic havoc in the markets that China needs most, North America and Europe. As the Euro Zone has worked to forestall a Greek debt default it instituted austerity measures that are expected to bring on a recession this year. The cumulative effects of fewer imports to Europe and an overpriced real estate market at home may well bring about an economic hard landing in China.
The Yuan Has Cooled Off
As the Chinese economy grew the Yuan tended to rise in value. However, Chinese currency controls kept the Yuan at a lower price which served to keep Chinese goods competitively priced. As the economic pain worsened in North America, Europe, and elsewhere the pressure increased on China to let the Yuan float to a market level. Now, as the controls on the Yuan have been relaxed there is a risk of an economic hard landing in China. As such it is not impossible to imagine the Chinese Yuan falling in value if allowed to truly float versus the US dollar, Euro, Pound, and the rest. A harbinger of things to come is the Chinese stock market which has lost ten percent of its value in the last month and half of that in just a few days. If the Chinese stock market continues to head South and the long awaited Chinese real estate crash happens the economic hard landing in China could well drag down the Yuan with effects felt around the world.
Measures to Prevent an Economic Hard Landing in China
If things get tough China might take a page from the US Federal Reserve playbook. Buy bonds with printed money to lower interest rates to the minimum. This would stimulate industry and the Chinese economy. China might pursue more infrastructure projects and incur more national debt, eating away at its $3 Trillion in reserves. A substantially lower rate of interest on the Yuan could serve to reduce its price in the Forex market. In the meantime traders might just get used to the need to trade a declining Yuan instead of a rising and or manipulated Yuan. As always we are not suggesting that Forex traders trade the Chinese currency or that they ignore it.