6 Jan 2016
China: Reform & growth challenges manageable – TDS
FXStreet (Delhi) – Research Team at TDS, suggests that they have been explicitly provocative when they advocated that growth is less of an issue in China than most in the market seem to believe.
Key Quotes
“The China slowdown is not a factor one should neglect, but should not be over-emphasized either. China’s economy has steadily expanded in the past few years, though this is now happening at marginally slower rates than in the past.
Even if Chinese growth slows down to 6.5% in 2016, as we expect, or to 6%, as some believe, its contribution to global economic activity won’t change significantly. The problem is that the Chinese slowdown carries a negative impact on global commodity prices, to which EMs have historically exhibited positive correlation, comes at a time that other EMs also suffer from decelerating or otherwise subpar growth, and global markets remain somewhat jittery in the wake of the Fed’s first hike.
That said, the CNH-CNY have steadily appreciated in real and nominal effective exchange rate terms since at least mid-2014. Recent RMB depreciation has merely compensated for the 2015 moves in the second quarter of the year. So international competitiveness of China has been materially eroded over the past two to three years. Significantly more depreciation would be needed to recover that lost competitiveness. But, as we have written, this is not a viable avenue. Therefore, we think RMB depreciation may continue to the extent that adverse price action is interrupted by periods of consolidation.”
Key Quotes
“The China slowdown is not a factor one should neglect, but should not be over-emphasized either. China’s economy has steadily expanded in the past few years, though this is now happening at marginally slower rates than in the past.
Even if Chinese growth slows down to 6.5% in 2016, as we expect, or to 6%, as some believe, its contribution to global economic activity won’t change significantly. The problem is that the Chinese slowdown carries a negative impact on global commodity prices, to which EMs have historically exhibited positive correlation, comes at a time that other EMs also suffer from decelerating or otherwise subpar growth, and global markets remain somewhat jittery in the wake of the Fed’s first hike.
That said, the CNH-CNY have steadily appreciated in real and nominal effective exchange rate terms since at least mid-2014. Recent RMB depreciation has merely compensated for the 2015 moves in the second quarter of the year. So international competitiveness of China has been materially eroded over the past two to three years. Significantly more depreciation would be needed to recover that lost competitiveness. But, as we have written, this is not a viable avenue. Therefore, we think RMB depreciation may continue to the extent that adverse price action is interrupted by periods of consolidation.”