How Will a Slowing Chinese Economy Affect World Currencies?

Recent economic data from China indicates that half a year into a stimulus program there has been little evidence of an economic rebounds. A slower economy typically leads to a weaker currency. How will a slowing Chinese economy affect other world currencies? First let’s look at the news from China. The Economist reports on China’s economy.

TODAY’S economic data releases from China were a mixed bag. First, the bad news. It has been nearly half a year since China started easing its monetary policy, and there is still little sign of a rebound in growth. For anyone thinking that the economy would surge back to full throttle, the sluggish response to the stimulus is disappointing. There was, though, also a glimmer of good news. The downturn appears to be abating. Even the beleaguered property market appears to be finding its feet. This should assuage fears that the slowdown might spiral out of control and turn into a rout.

China is turning inward to develop its own infrastructure and its own economic base. This will make the Asian

nation less reliant on exports. Nevertheless the Yuan is likely to weaken along with slowing exports. How will a slowing Chinese economy affect world currencies?

Third World Raw Material Suppliers

According to Reuters China’s crude oil imports hit a record last month, surpassing the USA.

China overtook the United States as the world’s top importer of crude oil for the first time in April, and its purchases are expected to remain strong despite a slowing economy, with far-reaching consequences for global oil and commodities markets.

China’s crude oil imports hit a record of almost 7.4 million barrels a day (bpd) last month, putting it ahead of the United States’ estimated imports of 7.2 million bpd for April, Reuters data show.

China is already the world’s biggest energy consumer, with oil by far the largest traded energy market. Overtaking the United States means China is the top user of almost all commodities, including coal, iron ore and most metals, with far-reaching implications for markets which continue to shift from West to East.

There are two factors at work here. One is that the USA has hugely ramped up production with its oil fracking boom. The other is that China is cannot produce enough oil to satisfy its economy. Many had expected Chinese demand to fall off due to a slowing economy but lower interest rates seem to have encouraged more purchases. When we ask how a slowing Chinese economy will affect world currencies we are especially interested in countries that supply raw materials to China. From Brazil to Australia nations that export coal, iron ore and other minerals experience economic slowdowns that mirror those of China. And Chinese imports of coal fell last month.

Brazil for Example

Bloomberg Business reports that the Brazilian Real leads global declines.

Brazil’s real led global declines after the central bank eased support for the currency and as speculation that policy makers will wind down increases in interest rates threatened to dethrone the South American country as the carry trade champion.

Short term fluctuations of the real come from actions of the central bank. But longer term the issue is that Brazilian exports are down. This is an example of how a slowing Chinese economy will affect world currencies.