By Finrex Research
On a year to date basis, the Chinese Yuan has appreciated by almost 8 per cent against the US Dollar. The robust performance of Yuan was primarily the result of a weaker dollar, sound economic fundamentals, improved regulation of capital flows and increased global use of the currency. The US Dollar index has weakened by almost 11 per cent in the year 2017. The strengthening of the Yuan was backed by:
Stronger economic scenario
The world’s second-largest economy posted broadly strong data for 2017 on the back of a holistic global recovery. The pace of the economic growth has accelerated for the first time in seven years as exports, consumer spending and construction activities bolstered.
The Chinese economy grew 6.9 per cent, ending the year 2017 on a positive note as official figures topped the government target of around 6.5per cent . It is expected that the economic forecast will stay around 6.5 per cent in 2018 as well. In the meantime, China’s exports grew nearly 11 per cent from 2016, while the combined value of imports and exports rose by 14.2 per cent while the trade surplus was recorded at more than 2.87 trillion yuan — around $447 billion, a decline from 2016.
China’s forex reserves recovered from the downward trajectory they were on in the last two years to gain $129.4 billion in 2017. The current account surplus remained in a reasonable range and the financial account saw net capital inflow in the first three quarters of last year. However, while the global growth will provide some backing to China’s exports, the economy might face some hardships.
Risks to the Chinese economy in 2018
As we head into 2018, US Fed’s monetary policy and geopolitical risks pose uncertainties to the global economy, including the Asian leader China. U.S. President Donald Trump has repeatedly signalled tougher action on what he refers ‘unfair practices’ that have led to a massive trade deficit with China. The Chinese economy is also vulnerable to the rise in the US tax rates as an increase in rates would result in a capital outflow from China that would pressurize the Chinese Yuan. If this scenario prevails, the People’s Bank of China (PBOC) might tighten its grip on liquidity, which in turn would raise concerns about the outlook on growth. The risk of housing price bubbles is the top financial risk that regulators are monitoring.
The overall sentiment towards the economy is more or less pessimistic as the fear grows, surrounding the rising Debt-to-GDP ratio and a sudden collapse of the economy due to strong adverse shocks. The world’s second-largest economy must still learn to tame debt risks and control factory pollution. However, strong growth gives the government the room it needs to tackle such issues.
The road ahead
China’s economic growth in 2018 may slow down. Investors will need more leading indicators to better evaluate how China is solving domestic issues and developing new momentums. The economy should balance growth and prevent financial risk. A low growth performance will worsen financial stability and vice versa. In the longer-run, China can benefit from government-promoted innovation as well as structural reforms. Also, the ‘New China‘ initiative that is driven by technological innovation will be under constant speculation.
Meanwhile, the monetary policy is widely expected to be neutral and cautious in 2018. This is because the central bank is facing a dilemma between loosening policy to stimulate the economy and tightening it to curb financial risks. Due to such a scenario, the PBOC is unlikely to cut interest rates and it is expected to make a fundamental change in policy, but that will depend on the progress in controlling financial risks.
As China moves ahead to deepen and open its financial markets to rebalance its economy, a gradual approach to liberalizing its capital markets and increasing its capital account convertibility is highly necessary. In the meantime, the investors will be keenly watching the opening-up theme, that can both negatively and positively impact the Chinese economy. Besides, as the Chinese market becomes accessible to the overseas investors, it will generate a fresh growth momentum for the economy and attract substantial levels of capital inflow.
Featured Image Source: Pixabay
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