China’s Economy on Shaky Ground as Yuan Plummets and Stocks Tumble
As the clock ticks down to Donald Trump’s second term as US President, China’s financial markets are reeling from the impact of his threatened tariffs on Chinese imports. The yuan has plummeted to its lowest level in 16 months, while the blue-chip stock index has touched its weakest point since September.
Central Bank Scrambles to Stem the Tide
In a bid to calm investor nerves, China’s central bank and stock exchanges have gone into damage control mode. The Shanghai and Shenzhen stock exchanges have held emergency meetings with foreign institutions, assuring them that China’s capital markets will remain open. Meanwhile, the People’s Bank of China is considering issuing more yuan bills in Hong Kong to absorb excess currency and curb speculation.
Yuan Weakness Sparks Capital Outflow Concerns
The yuan’s recent weakness has sparked concerns about capital outflows, which could further dampen investor sentiment. According to Charu Chanana, chief investment strategist at Saxo, preventing a sharp decline of the yuan is crucial for China’s economic recovery. “Any tactical recovery this year will need more than just stimulus measures, particularly whether China can negotiate a deal with President-elect Trump,” Chanana said.
Economic Woes Persist
China’s economy has struggled in recent years, with a property downturn and slowing income sapping consumer demand and hurting businesses. Exports, once a bright spot, could face hefty US tariffs under a second Trump administration. The S&P 500 has risen 4% since the US election, while China’s CSI300 index has dropped 4.3%, highlighting the worries around tariffs.
Support Measures Fall Short
Despite introducing various support measures since September, including swap and relending schemes totaling 800 billion yuan, Chinese authorities have failed to stem the tide of investor pessimism. The yuan has consistently hit multi-month lows since Trump’s election victory, triggering capital outflows.
Bond Yields Plummet
Falling domestic yields and broad dollar strength have undercut China’s efforts to stall the yuan’s decline. The central bank has warned fund managers against pushing bond yields even lower, amid worries that a bubble in bonds might stymie Beijing’s efforts to revive growth and manage the yuan. Long-term yields are at record lows, reflecting deeply entrenched deflationary pressures.
Consumer Confidence Key to Recovery
A key test for consumer confidence will be the impending Lunar New Year celebrations, which start on January 29. According to HSBC’s chief Asia economist Fred Neumann, greater evidence is needed that China’s economy is responding to stabilization measures. “After many fits and starts over the past year, investors are waiting for concrete signs that demand is responding,” Neumann said.
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