Chinese exports fell 8.3% on an annual basis

Dezan Shira & Associates on Chinese economy and Yuan

Chinese exports fell 8.3% on an annual basis, while the Producer Price Index sank 5.4% year-on-year, dropping hints that the country’s economy might be actually declining. What was the additional driving force behind the PBoC’s decision to devalue the Yuan in your opinion?

The primary reason behind this move was to make Chinese exports more competitive. However, I think that, even though the scale of the devaluation may have caught some by surprise, it probably has been coming. Further devaluations would be more indicative of a tendency to manipulate the currency, though. China does do this but recently has been fairly even handed. We will see if pressures cause them to become manipulative rather than market-led again.

To your mind, will the devaluation of the Yuan affect the decision by the Federal Reserve in terms of a rate hike this year?

In my opinion, the devaluation of the Yuan will affect the decision by the Fed significantly. However, there is still a lot of water to go under the bridge, and we will have to wait and see what happens in this turbulent time in the global markets.

Since the world’s economic recession of 2008-2009, China was the largest contributor to global growth, accounting for a third of expansion in the economy. Do you believe that China may provoke the next global recession?

China’s stock markets are not actually an indicator of global strengths or weaknesses; they are insular and separated from the global trading reality. So once analysts get over the ‘indications’, they will start to realise that China is actually isolated. Hence, overseas stocks will rebound. We will have to see whether the Chinese market, controlled completely by the CCP, will behave in the same way. I suspect it will not, and once analysts understand China’s stocks have little to do with global values, they will forget issues over Chinese ushering in a global recession.

What performance do you expect from the Yuan till the end of 2015?

It depends on how manipulative China wants the Yuan to be. In case they devalue much more, they will lose credibility, so the Chinese may take a hit. Moreover, they will need to, if they want to continue promoting the Yuan as a global trading currency.

What would be your forecasts for USD/CNY and EUR/CNY for the same period?

I think the Chinese will take the longer view and probably suffer losses. I suspect the RMB will not change its position much against either the USD or Euro. As the Chinese valuate their reputation, they will have to maintain the present currency value for some time after the recent devaluations.