While
Europe and the UK are staggering along trying to fend off collapse and
recession, China
has continued to roar ahead
Performers
play the dragon dance during the Chinese New Year parade
Something
to celebrate: China started its New Year with encouraging growth figures
Last
week’s news that China's growth was finally slowing was a surprise – not
because it wasn’t expected, but because it didn’t slow by much.
Its
gross domestic product figures grew by an annual rate of "only" 8.9
per cent – something the UK can only dream of at the moment – a fall of just
0.2 per cent, but still the weakest in two and a half years.
In
this year of the dragon, a lucky symbol for the locals, the sun is continuing
to shine on China.
As
strategist Will Poole of FC Exchange says: “Growth may have been down from 9.1
per cent the previous quarter, but this is a little like Elle Macpherson
panicking about putting on 2lbs after Christmas – she is still in great shape.”
In
fact, it was arguably a welcome development as the Chinese are worried about
inflation becoming unmanageable.
“For
some time now, analysts have suggested that robust growth levels in China, as
high as ten per cent, would prove unsustainable, provoking high levels of
inflation consistently above target rates, combined with the fear of asset
bubbles,” explains Poole.
The
question that is vexing international observers is whether China will come down
to earth with a bump or whether it will float down softly to land. The
situation in the east is being helped by the fact that the focus of global
markets is on Europe.
“In
all likelihood, a hard landing is unlikely in China,” believes chief economist
Jeremy Cook of World First. “The People’s Bank of China has the ability to ease
monetary policy substantially if needs be, via interest rate or reserve
requirement ratio cuts.
“The
recent GDP figures have shown that Chinese consumers made more of an impact on
the output figures than has previously been the case. If we can see China
rebalance its economy away from being so dependent on the manufacturing and
export side then it will certainly soften any fall-off globally.”
The
People’s Bank of China has already cut interest rates, which is one reason the
yuan has weakened this year. And currency analyst Christopher Vecchio, at
DailyFX, the research arm of FXCM, agrees with forecasts that the rate will be
cut at least twice more by the end of the year.
However,
the yuan is not a free-floating currency. In fact, Americans manufacturers
argue that it is undervalued by at least 40 per cent, giving the Chinese an
unfair advantage in the export market.
“If
the yuan were to be freely convertible in the FX markets then it would be a lot
stronger than the current level, and let’s not forget that the trend over the
past few years has been for this currency to strengthen,” says Chris Towner,
the director of FX Advisory Services at HiFX.
“China
sits with a huge current account surplus and has no requirement to borrow from
the international markets, as it has a three trillion-dollar thick mattress to
sleep on. Where would you want to stay with your money at the moment in the
current environment; sleep on a beautiful thick mattress or go camping in the
cold rain that is pouring down in Europe?”
But
chief economist Michael Derks of FxPro doesn’t agree that the yuan is
artificially low: “The assumption of most commentators that the yuan is
massively undervalued now has much less validity, and it is much harder to be
definitive about near-term direction. Indeed, should the thirst for dollars
continue over coming months, it would be very difficult and painful for China
to resist the pressure for a devaluation, which no doubt would anger American
politicians.”
Amazingly,
given the parochial nature of American politics, China’s currency manipulation
is one of the issues being debated in the run-up to the presidential elections.
Daniel
Abrahams of MyCurrencyTransfer.com comments: “No doubt opportunistically, the
self-proclaimed ‘job maker’ and Republican front-runner Mitt Romney has made it
one of his first priorities to crack down on China by controversially looking
to impose duties on its imports. While Obama has not fully labelled Beijing a
currency ‘manipulator’, appeasing US exporters will no doubt take centre stage
as a policy issue in the presidential election."
However,
the Chinese will go to almost any lengths to keep their currency from
strengthening. There’s a great deal at stake as Charles Purdy, managing
director of Smart Currency Exchange, says: “To maintain exports and industry at
home the Chinese are trying to keep their currency from strengthening,
otherwise their home economy will suffer and the hoped-for soft landing will
become a hard landing. Even then they may not succeed as markets elsewhere
contract. They will certainly not allow their currency to appreciate.”
The
country’s huge balance of payments surplus is mostly held in foreign currency.
Originally, it was mostly converted into US dollars but given the economic
problems, it diversified into euros – another highly liquid currency – by
snapping up euro bonds.
This
means that China is also exposed to the dangers of eurozone countries
defaulting on their debts, and it is in its interest to keep the single
currency countries together.
“The
eurozone is its largest trading partner on the whole,” says Vecchio. “But a
Greek default will affect American financial institutions greater than Chinese
financial institutions, in my opinion.”
Any
chance that the yuan will become a world reserve currency in the same way as
the US dollar is a long way off while it remains a tightly controlled currency.
But
Alistair Cotton, a corporate dealer
at Currencies Direct, believes it
has started to inch in that direction: ”I think it will eventually become a
global currency to match the euro or Japanese yen and the Chinese government is
implementing important changes needed to achieve that aim as we speak. But
China will need to improve its political system, rule of law and five decades
of history if it wants to challenge the US dollar as the global reserve
currency.
“Important
steps in freeing the yuan from the tight constraints of the Chinese central
bank have already been taken. Allowing the yuan to trade in Hong Kong was the
first baby step.”
And
Chancellor George Osborne is hopeful that London will be chosen as an offshore
trading venue. The flipside of these moves is that if it does become more
integrated into global financial systems, then demand for its currency will
drive it up.
The
arguments against it happening any time soon are laid out by Derks: “The Chinese
yuan is still a long way from becoming an international currency. It is not
freely floating, it is not fully convertible, and the local capital market is
still primitive. Also, investors could not rely on the currency as a store of
value – a pre-requisite for any reserve currency.”
Written
by Liz Phillips
Original
Source: The Telegraph – Please
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