Chinese officials announced that they’ll be easing their intervention in the currency market to let the yuan trade more freely as well as gradually removing caps on deposit rates. These are two big steps in the right direction for China to rebalance their economy with less of a reliance on government driven investment and a heavier contribution from consumer consumption as a percentage of GDP, which is currently unprecedentedly low.
The yuan peg to the US dollar and artificially low interest rates were two forms of consumer repression which effectively subsidized (transferred wealth from the household sector) corporations, banks and the government to accelerate GDP growth. By removing these, we should see a continued appreciation of the Chinese yuan, higher household incomes, lower state-owned bank profits, a drop in the trade surplus, and ultimately, lower GDP growth. Some might think that a falling rate of growth is bad for China when in actuality this is exactly what China needs in order to correct the imbalances and create a much more stable economy. If they didn’t take these measures, they would undoubtedly suffer a very severe contraction.
With over 1.3 billion people, these policies will be long-term positive for companies that do business in China in the areas of consumer products, housing, autos and food; and it will be negative for producers of raw materials as the government slows the infrastructure boom. While slower GDP growth will most likely be negative in the intermediate term for Chinese stocks, it will create an absolutely fantastic long-term investment opportunity a few years from now.
I’ve had my eye on the yuan as an alternative to short-term bonds and will most likely look to buy some on any weakness. It’s seen a steady appreciation of about 4%/year lately, and this should continue if not accelerate.
Thanks for following!
Nick