The health of the Chinese economy has been a source of concern since the beginning of the year, when the Chinese authorities unexpectedly allowed their currency to weaken sharply.
It was an attempt to guide market expectations that they were committed to a number of different measures to help rebalance their economy towards domestic consumption and away from the rust-belt industries of manufacturing.
The slide in the yuan since the beginning of the year hasn’t totally been as a result of the willingness of Chinese authorities to allow the currency to fall; the strength of the US dollar has also played a part as well, a fact that some US politicians conveniently overlook.
Being tied to the US dollar brings its own problems though, and the rise of the dollar since 2014 particularly against the euro and the Japanese yen has brought about issues for Chinese authorities, given that these two markets are China’s two biggest export markets. Even now the ability of Chinese authorities to weaken their currency is limited but thus far we have seen the offshore remnimbi slide to its lowest levels since mid-2010.
This slow depreciation does appear to be gradually having an effect, along with the recent rebound in commodity prices. Inflationary pressures appear to be returning, with factory gate prices moving back into positive territory for the first time in five years. The latest economic data also appears to be showing some modest improvement, with the manufacturing PMI’s for October posting their best levels in over two years.
This week we’ll get another snapshot of the trade picture for the Chinese economy, and while it remains too early to tell whether this rebound is sustainable it should give an indication as to whether we’re headed in the right direction.
In September the trade numbers were disappointing, with the export picture particularly so given the recent weakness in the currency showing a 10% decline. This would appear to suggest that global demand either remains weak or that Chinese exports remain uncompetitive despite the slide in the currency. Imports were also disappointing in September, declining 1.9% though this was largely as a result of a slowdown in demand for commodities.
The expectations for October aren’t expected to be too different from September; however what we don’t want to see is a further deterioration in the trade picture. Another weak export performance is likely to prompt speculation about further currency declines against the US dollar as Chinese authorities look to boost lost competitiveness. Exports are expected to show a decline of 6% and imports to a decline of 2%.
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