Falling Chinese Exports and the Yuan

Over the last five years the Chinese Yuan or Renminbi (CNY) has strengthened substantially against the US dollar. Only in the last year has the dollar reclaimed any lost ground. The strong Yuan coupled with a weakened world economy has hit Chinese exports. Our interest is in falling Chinese exports and the Yuan. Bloomberg Business shows the USD CNY conversion rate over the last five years. It shows a fall from 6.8 Yuan to the dollar to the 6.2 range.

The path taken by the USA out of the recession was mapped out by the US Federal Reserve under its former chairman, Ben Bernanke. When the stock and real estate markets collapsed around the world roughly $7 trillion in equity simply disappeared. Bernanke is a recognized expert on the causes of the Great Depression. Knowing which road not to follow was critical for the American recovery. The Fed bailed out banks and the likes of General Motors. They instituted a stimulus program called quantitative easing in which they purchased as much as $85 billion in treasury bills and corporate bonds each month in three phases over six years. The end results were to, a cheaper US dollar and a substantially healthier US economy. But, how does this fit into falling Chinese exports and the Yuan?

Weakened Chinese and World Economy

Reuters reports that China’s March exports shrink fifteen percent year on year.

China’s export sales contracted 15 percent in March [which is] a shock outcome that deepens concern about sputtering Chinese economic growth.

The tumble in exports – the worst in about a year – compared with expectations for a 12 percent rise and could heighten worries about how a rising yuan CNY=CFXS has hurt demand for Chinese goods and services abroad, analysts said.

The yuan’s strength was one factor in March’s 19.1 percent on-year decline in exports to the European Union and 24.8 percent drop to Japan.

In a sign that domestic demand was also tepid, imports into the world’s second-biggest economy shrank 12.7 percent last month from a year ago, the General Administration of Customs said on Monday. By volume, coal imports plunged more than 40 percent in January-March.

A rising Yuan has made Chinese products more expensive in virtually all markets. This puts downward pressure on Chinese exports. It also reduces demand from China for raw materials from a whole host of suppliers. The Chinese economy is hurting. Coal imports fell by forty percent as factories cut back. A strong Yuan has hurt Chinese exports and a weakened Chinese economy is contagious.

Tying the Yuan to the Dollar

The USA has worked its way out of the recession and has be best employment numbers in years. The oil fracking boom is helping the economy by keeping gasoline, natural gas and home heating oil prices down. And the US Federal Reserve expects to raise interest rates later this year. In a world of low interest rate this is big news. Smart traders are parking their assets as dollars which drives the price of the dollar up. And because the Yuan is pegged to the dollar it drives up the price of the Yuan as well.

Falling Chinese Exports and the Yuan

Forbes reports on China’s trade numbers.

China’s exports slumped 15 per cent in March against a year earlier in a sharp reversal of the past two months’ growth and raising the prospect of disappointing first-quarter economic growth.

Jitters about the slowing Chinese economy, for which Beijing has set a growth target of “about 7 per cent” this year, reverberate globally and have already helped dent commodity prices. Markets will be watching closely when the country releases its estimate for first-quarter gross domestic product on Wednesday.

China is buying less as well as shipping less: March imports fell 12.3 per cent compared with the same month last year.

There is said to a bit of “lumpiness” in Chinese reporting of trade figures but nevertheless a 15% fall is significant. The concern beyond falling Chinese exports and the Yuan is that when China manufactures less it also buys fewer commodities from the third world. These are countries that owe money to China and buy their products as well. Falling Chinese exports could be a sign of a significant economic downturn and the need to uncouple the Yuan from the dollar and let it fall!