Will the Yuan Continue to Plummet?

Despite Mr. Trump’s rhetoric during the election campaign China is no longer manipulating its currency to keep it cheap. Rather the land of managed capitalism is fighting to keep the value of the Yuan from falling further. It all as to do with the state of the global economy, excessive debt in China and an economic plan that no longer works like it did as China was in the first part of its growth cycle. Bloomberg says that Yuan pessimists are multiplying.

China is tightening capital controls as the imminent renewal of a foreign-exchange conversion quota adds to depreciation pressure on the yuan.

Chinese citizens are allowed to convert $50,000 worth of yuan annually, and with the new year less than a month away, the potential for capital flight is building. Individuals and households are the biggest threat to the yuan now, because they can easily be influenced by short-term volatility, according to Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. The yuan has weakened 3.1 percent this quarter amid concern the Federal Reserve will raise borrowing costs, strengthening the dollar.

The well to do have been moving their assets into dollars for a few years as they see the greenback as a safe haven while the Yuan falls in value. Return on property and stock investment in Yuan has fallen due to property price curbs and a declining equity market. Exporters are keeping their profits in dollars instead of converting them into Yuan. Chinese banks have been selling Yuan for months in an attempt to drive the Yuan upward and not having much success. The root of the problem is the debt and industrial plant excess that is a result of China’s economic plan.

How Fast or Slow Is China Growing?

CNS News questions if the Chinese economy is hitting stagnation. Although China’s current official figures say the GNP is growing at 7% per year that is in doubt.

The volume of rail freight traffic has declined for two consecutive years and electricity consumption has risen only 0.5 percent during the past year.

These microeconomic factors point to an economy growing in the 4-5 percent range.

Most importantly, much of the recent growth has been manufactured by enormous credit growth. Despite the authorities’ goal of wanting to trim total debt, total social credit growth is advancing close to the pace it was during the 2008-2009 global financial crisis.

Imports have also been falling-clear evidence that domestic demand has slowed more than the authorities or headline numbers acknowledge. Despite stringent capital controls, capital flight has clearly accelerated as affluent Chinese have lost confidence in the domestic economy.

Given China’s rising debt and a global economy not ready to accept a huge increase in Chinese products the Yuan may well continue to plummet as China’s economy weakens and the rich in China manage to move their money offshore. The Yuan may fluctuate up and down but a weaker currency is probably the case for the foreseeable future.