The Chinese Plateau


It seems that China’s currency has hit a brick wall. President Obama has long pressured Chinese President Hu Jintao to curb inflation as the yuan has rapidly appreciated (gaining 3.5% this year alone, the second largest appreciation out of 25 emerging market currencies). Now however, it seems out of all emerging markets China has become a laggard. China’s currency is expected to perform the worst out of the BRIC countries during the current and following quarters.

Only a few weeks ago the reverse expectations were true. The yuan had indeed fallen, but with the Premier’s intervention to curb lending rates and plans to decrease reserve ratios, spending was predicted to increase. Bond yield spreads between short-term notes and 10-year securities were also at their highest since May, indicating an expected economic recovery to standard GDP levels (9-11%). Inflation has been the primary concern for the past few quarters. However, with the upcoming Chinese New Year in January it seems China is now appropriately worried about meeting consumer demands for loanable funds.

China now faces low demand for its renminbi-denominated bonds, extending the trend to a continuous six months. Investors clearly lack the strong backing of Chinese Dim-Sum bonds, and with good reason. If forecasters are correct and China’s exports are indeed significantly less than previous months, there is a possibility for currency depreciation. Trade surplus has already been decreasing, only $17 billion last month against 2010 October’s $27.2 billion.

The additional factor of $1.9 trillion dollars in Chinese debt accounting for 19% of GDP also has many investors worried. While it is far from U.S. debt holding 62% of GDP, China certainly seems to be on a well-worn path both the Americas and Europe are facing.

The numerous cases of beta convergence have certainly proved one fact, time-tested and proven in the U.S. itself: growth is only sustainable for so long. China’s “golden age” is subject to a plateau first-world countries now face, and with a global economic crisis it may arrive sooner than previously thought.

~Zeena Advani