A four day meeting of the highest ranking members of the Communist Party in China resulted in a blueprint for far-reaching reforms. The roadmap for further economic development in China addresses the problem of increasing pollution, too-easy credit, the real estate bubble, and land rights in general. This blueprint for economic change in China boosted stocks in both Shanghai and Hong Kong followed by markets across the world. The Yuan and other growing market currencies rose against both the USD and Yen in response to the news of dramatic economic change in China. This is the first substantial move by the new Chinese president, Xi Jinping. Along with internationalizing the Yuan the new plans for China are mean to help wean the third ranking economy fro a diet of too-easy credit and exports.
As Goes China So Go Its Suppliers
Upon news that China is taking steps to fix the problems in its economy the currencies of nations that supply China with raw materials profited. The recent fall of the Brazilian real has had as much to do with reduced manufacturing in China as anything else. As China looks to stabilize its economic and social picture we may expect to see the Yuan strengthen further and see the currencies of nations like Australia and Brazil go up as well. Forex currency rates across the world will likely adjust to economic change in China and an approach that is more sustainable that the currently tired approach to too much credit and too many exports.
How about the Major Currencies?
The prospect of economic change in China boosted many minor currencies plus Australia which is a major raw materials supplier to China. But the major currencies also have other concerns. First among these is the use of economic stimulus by way of printing money to drive jobs and business and manufacturing recovery. The US Federal Reserve is still pumping $85 Billion a month into its quantitative easing program. When they start to reduce the size of this program, interest rates will rise in the USA. A similar situation exists in Europe and Great Britain. The Japanese have embarked on a program that is reducing the price of the Yen and driving exports higher. In the short term these factors outweigh the importance of economic change in China on the heels of the recent meeting of the Communist Party heads.
Open Markets in China
The plan for economic change in China includes plans for more open markets to foreign investment. This would mean than investors could move money more easily in and out of China and in and out of Yuan denominated investments. This would require a less constrained exchange of the Yuan than now exists. It would also require and result in a more internally competitive Chinese economy. Government controlled companies would need to compete with the private sector and without safety nets. Along the way China will likely develop a social security system and will reduce the one couple, one child plan that has helped slow population growth. One of the problems associated with that policy is an aging population in China, fewer younger workers, and more elderly with fewer children to support them.