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Renminbi vulnerable to debt, lower growth

by Adam Cotter

Renminbi vulnerable to debt, lower growth


President Xi Jinping has focused on an anti-corruption campaign and extensive foreign policy innovations against a background of geopolitical tension and slowing growth. Some observers have noted Beijing’s apparent hesitancy to implement economic reforms. Commitment to reform is central to the party’s desire for stability and predictability.

The People’s Bank of China is trying to manage asset bubbles while not unduly cutting credit growth. China’s leaders are still placing their faith in Governor Zhou Xiaochuan – now well beyond his official retirement age. He has helped steer the nation through the global financial crisis, overhauled monetary policy tools and overseen the renminbi’s elevation to reserve currency status. China’s $9.15bn trade deficit in February (although partly due to seasonal factors), alongside the lower China 2017 growth target, appears to show the export giant’s trade status in a difficult position. Challenges may grow further in the light of protectionist US rhetoric and the European Union’s efforts to curb cheap Chinese steel imports. If President Donald Trump levies import tariffs on Chinese goods, Beijing will point to its spending of well over $1tn trying to stem the renminbi’s fall. Pan Gongsheng, director of the State Administration of Foreign Exchange, says the foreign exchange market will remain stable.

The country’s foreign exchange reserves saw a modest rise of $6.9bn in February, reflecting the success of efforts to curb capital outflows. This will help improve confidence in the renminbi. Exchange rate fluctuations in the second half of 2016 were exacerbated by China’s accelerated outbound investments and the US presidential election result. However the renminbi remains vulnerable to high and growing Chinese debt.If Washington does impose protection measures, the renminbi is likely to fall further – increasing China’s competitiveness and worsening the position of the American enterprises Trump is trying to shield. The irony of a possible renminbi devaluation is likely to be lost on the Trump administration, but not on the Chinese leadership.

Adam Cotter is OMFIF’s Head of Asia and Chief Representative of the Asia office in Singapore.

Renminbi Liaison Network