Slower Chinese Economic Growth and a Cheaper Yuan

The Chinese Yuan has fallen versus the US dollar for four months in a row. This is the Chinese currency’s worst performance since 2007. For Forex traders this has to do with slower Chinese growth and a cheaper Yuan, now and in months to come. The government / People’s Bank of China are trying to avoid an economic hard landing in a country that has been the envy of the developing world for decades. There is still the risk of a Chinese real estate crash due to a grossly inflated housing bubble. Credit has been way too easy, especially for those with Communist connections in the land of state run capitalism. With slower Chinese growth and a cheaper Yuan for some time to come how should a Forex trader react? As usual fundamental analysis and attention to technical details are important. And, as always never trade what you do not understand. Those admonitions having been made, here are a few Forex thoughts about slower Chinese economic growth and a cheaper Yuan.

What Goes Around Comes Around

The USA was stuck in an inflationary slide throughout the 1970’s largely due to excess spending in the Vietnam War coupled with vastly expanded social programs. Common thinking was that the day of the USA was past and Japan was set to take over the economic world. Then the Regan administration took Milton Friedman’s advice and jacked interest rates up. This inaugurated one of the longest American economic expansions ever. Japan did seem ready to take over the world by the late 1980’s until a soft underbelly of hidden loans lead to two decades of deflation from which the nation is just now recovering. Then comes China with its vast cheap labor pool and a billion person market for Western products. Investment flourishes and everyone needs to manufacture in China using Japanese management techniques and German engineering. The internet provides retailers with immediate sales data and orders are wired to China to efficiently take advantage of hot sales items. Unfortunately many Western companies also outsource their expertise and find that they have a front office and design shop but little else in the supply chain.  North America and Europe become huge and lucrative markets for Chinese products. A cheap Yuan is part of the picture as China manipulates interest rates and buys US treasuries to the tune of a trillion or so. And then the 2008 recession hits and orders to Chinese factories from North America and Europe decrease. And manufacturing starts to move back to the USA, Germany, France, etc. China needs to sell internally and has not yet accomplished that goal. In the meantime we are seeing slower Chinese economic growth and a cheaper Yuan.

Trading Opportunities

Where are slower Chinese growth and a cheaper Yuan going? Most experts expect to see continued shrinking of Chinese growth. The nation’s economy is still expanding but in all likelihood Chinese growth will eventually look like what we see in Japan, North America and Europe. What goes around comes around and China cannot run a huge trade excess with the rest of the world forever. Other nations will not put up with that and other factors apply as well. China’s one couple one child policy has left China with an aging population and therefore fewer young and cheap workers. The Yuan is falling and is unlikely to rebound soon. Traders may which to use Forex options in this regard in order to contain risk and leverage their trades.