Slower Chinese Growth and the Yuan

Markets are waking up to the fact that the near miraculous economic growth of China is coming to an end. ABC News reports that Asian stocks are down on China growth doubts.

China’s Shanghai Composite shed 1.3 percent to 3,637.21 and Japan’s Nikkei 225 dropped 0.2 percent to 19,718.56. South Korea’s Kospi lost 0.1 percent to 2,034.38. Hong Kong’s Hang Seng sank 0.6 percent to 24,351.20. Australia’s S&P/ASX 200 rose 0.2 percent to 5,965.10 but other regional markets were down including indexes in Taiwan, Malaysia and the Philippines.

CHINA WORRIES: China’s manufacturing fell to the lowest level in nearly a year as new orders shrank. HSBC’s preliminary manufacturing index based on a survey of factory purchasing managers dropped to an 11-month low of 49.2 in March, from February’s 50.7. The index is based on a 100-point scale on which numbers above 50 indicate expansion. China’s economy expanded 7.4 percent last year, its slowest pace in nearly a quarter century, and economists predict growth will slow further this year and the next.

As China’s economic growth slows to the lowest numbers in almost 25 years the question is, what about slower Chinese growth and the Yuan? Forex traders will want to follow events in China as its economy slows and its real estate bubble collapses.

Chinese Real Estate Bubble

According to the New York Times, things have gotten so bad in the Chinese real estate market that Chinese banks have provided a $16 billion credit line to prop up an endangered Chinese developer.

Chinese banks have extended $16 billion in credit lines to shore up one of the country’s largest and most heavily indebted home builders, as pressure mounts on developers short of cash in a slumping property market.

The move by a group of mainly state-run banks to bolster the builder, Evergrande Real Estate Group, which is controlled by the billionaire Hui Ka Yan, is the latest sign of tumult in China’s sprawling housing sector.

Developers are rushing to secure financial support as sales volumes and housing prices plunge, weighed down by a growing overhang of unsold homes. The Kaisa Group, once a favorite of foreign investors, nearly defaulted on its offshore debt this year before being rescued by another developer.

China has been famous for its ghost cities where developers have built and investors have purchased property only for building after building after mall to remain empty. The bubble has begun to deflate in the Chinese real estate market and the government is worried as shown by the bailout of Evergrande Real Estate Group. Along with slower Chinese economic growth the collapse of real estate price will suck equity out of the Chinese economy and likely drive the Yuan downward. Why does this matter for Forex traders?

The Yuan as a Reserve Currency

Bloomberg reports that China would like the Yuan to be the World’s 5th reserve currency. This will require that the currency trade more freely with other currencies and will attract traders.

China is a step closer to obtaining Special Drawing Rights status for its currency from the International Monetary Fund, a move that would see the yuan joining the greenback, euro, yen and British pound.

At a forum on Sunday, central bank Governor Zhou Xiaochuan swapped the topic of a panel discussion so he could pitch the renminbi’s readiness for reserve status to his co-speaker, IMF Managing Director Christine Lagarde. Premier Li Keqiang told Lagarde in a meeting Monday that China hopes to get the IMF’s seal of approval, according to the government. It may have worked.

China wants special drawing rights to show that it has arrived as a genuine world leader, to reduce borrowing costs, to increase the demand for Yuan as an international currency and to counter the dominance of the US dollar which is currently part of 85% of all Forex trades. If this comes to pass the Yuan will be traded more heavily and issues such as slower Chinese growth and the yuan will become major Forex issues.