2017 will be the year of currency wars – And China plays an important role

by  SECULAR INVESTOR

Source: ft.com
The past few years, ‘currency war’ was the ‘talk of the town’, but truth be told, there was no real ‘cold’ trade and currency war. In fact, the European Central Bank kept on decreasing its benchmark interest rates when the Federal Reserve took baby-steps to increase its own interest rates again, so we do have to take the previous ‘currency war’ declaration with a mid-sized spoon of salt.
But in 2017, the gloves might come off, as several countries have been warning for ‘expensive currencies’. China, for instance, might become under increased pressure from the Trump administration who will very likely announce and initiate some protectionist measures to boost the domestic economy inside the USA. China also is an easy ‘victim’ as it’s easy to use the country as a ‘target’ when things go wrong in the USA. The statement ‘the US Dollar is overvalued whilst China is keeping its currency rate artificially low’ isn’t coming out of the blue.

Source: The Economist
And of course, China will obviously encounter its fair share of problems as well, this year, as its annual growth rate just continues to decrease, and any protectionist move in the USA will aggravate the situation.
China is clearly worried, as its president, Xi Jinping, was one of the biggest advocates of globalisation and world trade at the recent economic forum of Davos. That’s not unexpected, as China has hands-down been the main beneficiary of the recent push for globalisation in the past sixteen years of this millennium.

Source: ABN AMRO
The country is clearly feeling the pressure on its economic situation, as even though the import growth rate has been picking up again, the export growth remains in the negative territory, pointing in the direction of a global trade pattern which is slowing down. To make things worse, the import growth was predominantly caused by a (temporary?) increase in the import of raw goods to replenish the stockpiles (before the Chinese new year starts).
And the pressure on the Chinese economy is coming from all angles. The real estate market seems to be bracing for (yet another) correction as the local governments have started to tighten the regulations in an attempt to slow down the overheating market. This seemed to be working as there has been a substantial slowdown in the total volume of mortgage applications, but it looks like this was just the first step.
China also had to solve the trilemma of having an independent monetary policy, the free movement of capital and a fixed exchange rate as that’s technically, theoretically and practically pretty much impossible. More measures have been announced and implemented (by suspending the possibility to purchase foreign assets that have no industrial use, and reducing the possibility for citizens to purchase foreign currency.

Source: The Economist
The credit growth rate remains positive and with credit levels increasing towards 300% of the GDP, China can’t afford any missteps as any serious contraction of its growth rates and/or the level of its economic activity could push the country over the cliff, with disastrous consequences.
China will need to keep its currency cheap and will have to work on its relationship with President Trump to ensure a good relationship. Globalisation is key for China, and a slower world trade will hurt the country.