This morning has shown a consequence of something I touched on yesterday I think. We have seen a big figure change in the Chinese currency.
Onshore #yuan #CNY weakens more than 0.5% against US dollar to hit 7.0025 at one point, breaking through 7 mark for first time since Dec last year. ( @YuanTalks )
It did so a few hours after the offshore version.
#YUAN BREAKS THROUGH 7 MARK Offshore yuan #CNH hit 7.0027 per USD at one point, breaking through 7 mark for the first time this year. #PBOC cut #yuan‘s fixing by 242 pips to 6.9748 per dollar on Wed, the weakest since Dec 29, 2022, vs a fixing of 6.9506 a day earlier. ( @YuanTalks)
It is true that the US Dollar is rallying today but remember the Yuan is a managed rather than an outright free floating currency so the Chinese have to some extent let it happen.
It is an accident of timing just after this was released.
Global central banks tapped a record amount of the Chinese currency in foreign-exchange swap lines in the first quarter, in another indication of the yuan’s growing international status. ( Bloomberg)
The exact numbers are below.
The outstanding balance of all foreign currency swaps was 109 billion yuan ($15.6 billion) at the end of March, according to data released by the People’s Bank of China on Monday. That was 20 billion yuan more than the level at the end of 2022, the second-biggest quarterly jump on record. The PBOC didn’t break down which nations had used the facility. ( Bloomberg )
There is a strong element of foreign policy here as well. But for our purposes this is a Chinese attempt to behave like the US in terms of assuring availability to their currency. Only on Monday we looked at one aspect of this.
Argentina announced in April that it would tap its swap line to finance imports from China after the peso suffered a selloff. ( Bloomberg)
The Argentine economy minister will travel to China later this month and will no doubt ask for more help. Indeed China seems to be making a push in South America.
Brazil also agreed to start settling some trade in local currencies and took steps to make it easier to transact with China in yuan. ( Bloomberg)
There is a difference in the FX Swaps in that the US use has mostly protected the banking system ( usually European and Japanese banks), with an ultimate back stop for trade in commodities which are priced in US Dollars. So far the Chinese use has been so that others can buy its goods and services.
The Economy
The numbers released yesterday looked strong on a casual reading,especially Retail Sales.
In April, the total retail sales of consumer goods reached 3,491.0 billion yuan, up by 18.4 percent year on year, 7.8 percentage points faster than that of the previous month, or up by 0.49 percent month on month ( National Bureau of Statistics)
That was below expectations which believe it or not were for more like 21%. But that missed a crucial point which is clear if we look at the March numbers.
In March, the total retail sales of consumer goods reached 3,785.5 billion yuan, a year-on-year increase of 10.6 percent.
So in fact we have a monthly decline of around 7.8% which creates a very different picture, Indeed the April numbers were below the previous monthly average for the year so far.
From January to March, the total retail sales of consumer goods was 11,492.2 billion yuan, a year-on-year increase of 5.8 percent.
The difference with the annual growth is that it was looking back to the periods of lockdowns and restrictions.
We can look further ahead to the prospects for consumption via Chinese imports.
In April, the total value of imports and exports of goods was 3,434.7 billion yuan, up by 8.9 percent year on year. Specifically, the value of exports was 2,026.5 billion yuan, up by 16.8 percent; and the value of imports was 1,408.1 billion yuan, down by 0.8 percent.
As you can see imports fell which is a leading indicator for expected consumption. In fact in the year so far we see that imports have been rather low for an economy that is supposed to be growing.
In the first four months, the total value of imports and exports of goods was13,323.2 billion yuan, up by 5.8 percent year on year. Specifically, the value of exports was 7,672.9 billion yuan, up by 10.6 percent; and the value of imports was 5,650.3 billion yuan, up by 0.02 percent.
In an economics text book this would be put as export-led growth and the export numbers are good. But we have learned from Japan and Germany that such economic models can come with weakness in domestic demand and consumption which means the population gains much less than one might think.
Indeed you could argue that something else which on the face of it looks like good news may also be a sort of warning signal.
In April, the consumer price index (CPI) went up by 0.1 percent year on year, or down by 0.1 percent month on month.
I am struggling to see how they get such numbers in the current environment. But if we take them at face value they too hint at weak domestic demand.
Production
This too was way short of expectations.
In April, the total value added of industrial enterprises above the designated size grew by 5.6 percent year on year, 1.7 percentage points faster than that of the previous month, or down by 0.47 percent month on month.
It was better in terms of annual growth than in March. But we do know that expectations for April are weak.
“The Caixin China General Manufacturing PMI in April dropped 0.5 points from the previous month to 49.5, slipping into contractionary territory for the first time in three months. This suggests that China’s economic recovery
significantly slowed after Covid-19 infections peaked at the start of this year, given that the index stood at 51.6 and 50 in February and March, respectively.”
Youth Unemployment
Whilst the overall unemployment situation improved.
In April, the urban surveyed unemployment rate was 5.2 percent, 0.1 percentage points lower than the previous month.
There is an issue with youth unemployment as CNBC explains.
The latest data included a 20.4% youth jobless rate, the unemployment rate between ages 16 and 24. The reading in April marked a record high.
“Many people, investors see this as a leading indicator. If the younger people are unable to get jobs, don’t have the income security, where is the confidence, where is the consumption recovery coming from?” said Wu.
Comment
There are a few warning signals here for future Chinese economic growth. That may well be reflected in the move by the Chinese Yuan which seems to be wondering about the prospect of another interest-rate cut. As I pointed out yesterday this goes against what had been the trend for 2023 which was for an improvement driven by the better energy price situation, or rather not quite as bad energy situation.
Perhaps they feel it too and it explains why they are switching emphasis to some extent.
“In the first four months this year, China’s shipments to ASEAN surged 24.1% from the year-earlier period, compared with a 10.6% growth in overall exports. Shipments to Africa jumped 36.9% and exports to Latin America increased 11.2%.” ( @michaelxpettis)