Why is China's currency getting weaker?

The yuan will continue to weaken

The Chinese central bank surprised many with the devaluation of the currency, but not Anne Stevenson-Yang. The China expert fears a pronounced weakness in China.

Christof Leisinger ⋅ The Chinese central bank recently surprised when it changed the mechanism for determining the exchange rate and devalued the yuan. For Anne Stevenson-Yang, being surprised does not apply. The entrepreneur, journalist and founder of the analysis company J Capital Research, who has lived in China for more than 25 years, has not only expected it, but thinks that the yuan will become significantly weaker in the future.

A devaluation of 2% or even a little more is too small to achieve the effects that are sought. It is even dangerous and expensive because it accelerates the flight of capital from the last $ 800 billion annually. The exchange rate, currently at 6.40 yuan per dollar, is still so far removed from a “natural level” that the central bank of China would have to spend around $ 100 billion a month to support it. A year ago she saw a reasonable rate of 7 yuan for one dollar, but now it is likely to be higher, says Stevenson-Yang.

The decision to change the exchange rate is ominous, but it indicates what is going on in the Chinese economy. After the International Monetary Fund approved the Chinese measures to stabilize the price development on the country's stock markets, the inclusion of the yuan in the currency basket to determine the value of special drawing rights can also be expected. After the devaluation of the yuan, however, it will be more expensive for Chinese companies to service their dollar debts, bankruptcies will increase, less capital will come to China from abroad, and higher unemployment is emerging - so the move will have some consequences yourself.

Stevenson-Yang does not believe in the beginning of a "currency war" as the Anglo-Saxon media paint it on the wall. She points to previous attempts to weaken the yuan. At that time, China was still able to back down. Today the pressure on the currency is so strong that something like this is no longer possible. China's economy is at a turning point. Since May there have been various indications that point to a weak development: car sales, private consumption, propensity to invest, lending, trading activities, energy consumption and, last but not least, transport volumes. If the country's fundamental problems are not addressed sharply and directly, the downturn could even accelerate.

The economic weakness will dampen the demand for raw materials, and the consequences of the steep fall in prices will be felt in countries such as Australia, Canada and Brazil. From the point of view of China-skeptical investors, it is logical to assume lower commodity prices, but also weaker currencies and share prices in the commodity-heavy countries. The devaluation of the yuan will put a strain on the earnings development of companies such as BMW, which are strongly integrated into China's economy. The already subdued sales development will be negatively impacted on the earnings side by currency effects.

The current calm on the Chinese stock markets and in the real estate sector is deceptive anyway. In fact, the centrally coordinated attempts to prevent dramatic falls in prices and rates in both areas limited the funding of real growth drivers. The Chinese government has lost its credibility by aimlessly wasting billions in national wealth on stabilizing the financial markets, while lending in the domestic market is falling significantly.

For fear of an interbank crisis, it does not seem to shy away from even the worst possible methods. The Chinese banks would have to be recapitalized in the face of a huge hidden write-down requirement - and if you look at the Bank of China's numbers, that seems to be happening behind the scenes.

Basically, it is doubtful whether China's political class has the courage to counter particular interests with decisive reforms. In view of the imbalances that have arisen, it is clear that things cannot continue as before, said Stevenson-Yang.

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