http://www.theforexnittygritty.com/forex/economic-hard-landing-in-china
Economic Hard Landing In China
Will an economic hard landing in China take the Yuan down with it? China’s economy has outpaced the world for the last thirty years. After China opened itself to the West and instituted market based economic reforms in 1978 its “managed capitalism” and cheap labor attracted foreign investment. China proceeded to copy what it learned as well. With growth rates commonly in the ten percent per year range China has accumulated currency reserves of over $3 Trillion, mostly in US dollars. However, as China’s economy becomes increasingly integrated with the rest of the world it also has become more dependent on the other economies of the world. The Great Recession that started in 2008 has caused serious economic havoc in the markets that China needs most, North America and Europe. As the Euro Zone has worked to forestall a Greek debt default it instituted austerity measures that are expected to bring on a recession this year. The cumulative effects of fewer imports to Europe and an overpriced real estate market at home may well bring about an economic hard landing in China.
The Yuan Has Cooled Off
As the Chinese economy grew the Yuan tended to rise in value. However, Chinese currency controls kept the Yuan at a lower price which served to keep Chinese goods competitively priced. As the economic pain worsened in North America, Europe, and elsewhere the pressure increased on China to let the Yuan float to a market level. Now, as the controls on the Yuan have been relaxed there is a risk of an economic hard landing in China. As such it is not impossible to imagine the Chinese Yuan falling in value if allowed to truly float versus the US dollar, Euro, Pound, and the rest. A harbinger of things to come is the Chinese stock market which has lost ten percent of its value in the last month and half of that in just a few days. If the Chinese stock market continues to head South and the long awaited Chinese real estate crash happens the economic hard landing in China could well drag down the Yuan with effects felt around the world.
Measures to Prevent an Economic Hard Landing in China
If things get tough China might take a page from the US Federal Reserve playbook. Buy bonds with printed money to lower interest rates to the minimum. This would stimulate industry and the Chinese economy. China might pursue more infrastructure projects and incur more national debt, eating away at its $3 Trillion in reserves. A substantially lower rate of interest on the Yuan could serve to reduce its price in the Forex market. In the meantime traders might just get used to the need to trade a declining Yuan instead of a rising and or manipulated Yuan. As always we are not suggesting that Forex traders trade the Chinese currency or that they ignore it.
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3. Will an economic hard
landing in China take
the Yuan down with it?
China’s economy has
outpaced the world for
the last thirty years.
www.TheForexNittyGritty.com
4. After China opened itself to the
West and instituted market
based economic reforms in
1978 its “managed capitalism”
and cheap labor attracted
foreign investment.
www.TheForexNittyGritty.com
5. China proceeded to copy what
it learned as well.
With growth rates commonly in
the ten percent per year range
China has accumulated
currency reserves of over $3
Trillion, mostly in US dollars.
www.TheForexNittyGritty.com
6. However, as China’s economy
becomes increasingly
integrated with the rest of the
world it also has become more
dependent on the other
economies of the world.
www.TheForexNittyGritty.com
7. The Great Recession that
started in 2008 has caused
serious economic havoc in the
markets that China needs
most, North America and
Europe.
www.TheForexNittyGritty.com
8. As the Euro Zone has worked
to forestall a Greek debt
default it instituted austerity
measures that are expected
to bring on a recession this
year.
www.TheForexNittyGritty.com
9. The cumulative effects of
fewer imports to Europe and
an overpriced real estate
market at home may well
bring about an economic hard
landing in China.
www.TheForexNittyGritty.com
10. The Yuan Has Cooled Off
www.TheForexNittyGritty.com
11. As the Chinese economy grew
the Yuan tended to rise in value.
However, Chinese currency
controls kept the Yuan at a
lower price which served to keep
Chinese goods competitively
priced.
www.TheForexNittyGritty.com
12. As the economic pain
worsened in North America,
Europe, and elsewhere the
pressure increased on China to
let the Yuan float to a market
level.
www.TheForexNittyGritty.com
13. Now, as the controls on the
Yuan have been relaxed there
is a risk of an economic hard
landing in China.
www.TheForexNittyGritty.com
14. As such it is not impossible to
imagine the Chinese Yuan
falling in value if allowed to
truly float versus the US dollar,
Euro, Pound, and the rest.
www.TheForexNittyGritty.com
15. A harbinger of things to come
is the Chinese stock market
which has lost ten percent of
its value in the last month
and half of that in just a few
days.
www.TheForexNittyGritty.com
16. If the Chinese stock market
continues to head South and
the long awaited Chinese real
estate crash happens the
economic hard landing in
China could well drag down
the Yuan with effects felt
around the world.
www.TheForexNittyGritty.com
17. Measures to Prevent an
Economic Hard Landing
in China
www.TheForexNittyGritty.com
18. If things get tough China
might take a page from the
US Federal Reserve playbook.
Buy bonds with printed
money to lower interest rates
to the minimum.
www.TheForexNittyGritty.com
19. This would stimulate industry
and the Chinese economy.
China might pursue more
infrastructure projects and incur
more national debt, eating away
at its $3 Trillion in reserves.
www.TheForexNittyGritty.com
20. A substantially lower rate of
interest on the Yuan could serve
to reduce its price in the Forex
market.
www.TheForexNittyGritty.com
21. In the meantime traders might
just get used to the need to
trade a declining Yuan instead
of a rising and or manipulated
Yuan.
www.TheForexNittyGritty.com
22. As always we are not
suggesting that Forex traders
trade the Chinese currency or
that they ignore it.
www.TheForexNittyGritty.com
23. Rather we offer a view of a
possible economic hard landing
in China for those interested in
pursuing the subject further in
search of trading profits.
www.TheForexNittyGritty.com
24. For more insights and useful
information regarding the Forex
markets and foreign currency
trading, visit
