New Chinese Normal and the Yuan

Forex traders will want to keep an eye on how the Communist leadership deals with a slowing Chinese economy. President Xi speaks of a new normal for China at the annual parliamentary meeting according to Reuters.

China plans to run its biggest budget deficit in 2015 since the global financial crisis, stepping up spending as Premier Li Keqiang signalled that the lowest rate of growth in a quarter of a century is the “new normal” for the world’s No.2 economy.

Speaking at the opening of the country’s annual parliamentary meeting on Thursday, Li announced a growth target of around 7 percent for this year, below the 7.5 percent goal that was narrowly missed in 2014.

“The downward pressure on China’s economy is intensifying,” Li told around 3,000 delegates gathered at the Great Hall of the People to the west of Beijing’s Tiananmen Square.

“Deep-seated problems in the country’s economic development are becoming more obvious. The difficulties we are facing this year could be bigger than last year.”

Chinese industrial growth has been spectacular for decades. And the Chinese economic growth miracle is coming to an end. As Forex traders we are interested in the new Chinese normal and the yuan. Will money poured into infrastructure and a push toward higher quality products save China from a hard landing? How will the new Chinese normal and the yuan work out?

Lower Growth Targets

Lower growth targets are simply a reality as Chinese industrial production and imports suffer. The Guardian reports as China lowers growth target to 7%.

China is targeting slower economic growth as tackles “deep-seated” economic problems and reduces its reliance on polluting fuels such as coal, premier Li Keqiang said on Thursday.

The world’s second largest economy will target growth this year of around 7%, the lowest expansion for a quarter of a century, Li told the opening of China’s annual parliamentary meeting in Beijing.

He also pledged to continue the fight against corruption, stressed the need for more painful reforms to support the economy in the longer term and said energy use would be cut.

China may be entering an era of persistent deficit spending. Of course, China has built up huge currency reserves over the years but a large modern nation can go through tens and hundreds of billions of dollars pretty quickly when attempting to stimulate their economy. Deficit spending commonly hurts a currency as the USA has found out over the years. The relationship of the new Chinese normal and the yuan will likely be a lower currency value for China.

Interest Rates and Currency Value

The new Chinese normal will likely include lower interest rates and lower interest rates will hurt the value of the yuan. Bloomberg reports PBOC seen cutting interest rates in response to a slowing economy.

The People’s Bank of China will cut benchmark deposit and lending rates again next quarter as the economy slows, according to economists surveyed by Bloomberg.

The median forecast is for a deposit rate of 2.25 percent and a lending rate of 5.10 percent in the April to June period, the survey of analysts from March 2 to March 3 showed. That’s 25 basis points lower on both from the previous survey.

More interest rate cuts are probably in store for China as it seeks to pull the economy away from recession. The relationship of the new Chinese normal and the yuan could well be a downward spiral of lower rates and economic weakening ending in a Japan-like deflation.