Is a Chinese Economic Downfall Inevitable?
America is billions of dollars in debt, but it’s still nothing in comparison to China, who has twice as much debt. The country is grappling with a multitude of poor choices while they’re attempting to calm investors down, because of the drastic drops in their currency. A few weeks ago, the People's Bank of China tried to guide the Yuan lower against the American dollar. Many analysts looked at it as an effort to better their economic situation by creating more opportunities for growth for the country’s exporters.
To their demise, the idea backfired. Investors who partook in the failed strategy panicked and swiftly sold the currently, certain it would be worthless the following day. Currency dealers in Hong Kong even added on to the pressure, making their Yuan even more worthless.
The Yuan was selling so fast that China recently had no choice but to spend billions purchasing the Yuan back. China also started to put a limit on how much funds a person could move out of the country, which is capped it at no more than $50,000 USD per year.
Last month alone, their bank burned an astonishing $108 billion in reserves. They recently reported to be interceding in the Hong Kong market in a tug of war to decrease total damage. Officials are putting the blame on speculators for the turmoil the market is in, while mentioning there is no correlation to the real condition of China's economy.
China stated that a few forces are trying to generate revenue from speculating on the Yuan. The result is only causing abnormal changes in its exchange rates while sending false signals to the market. Both this uproar and the banks response created lack of confidence which leaked into global stock markets.
Analysts at Natixis are extremely disappointed and say that policymakers should have realized the relationship with the volatility of asset markets and the Yuan. About two weeks ago the bank allowed the Yuan to increase slightly instead of dropping it lower.
Nonetheless, the currency did lose 6% against the American dollar since last fall. Analysts did not agree with the bank's decision and believed it would be a better idea to accelerate reforms to liberalize the currency, rather than defending it at a huge price. They also stated that it would count as the second time in the last few months that the bank bothered contributing to a market crisis they had no business doing. Around August 2015, investors were shocked at the Yuan's ever-changing daily trading limit. Around that time that banks completed a 2% devaluations of the Yuan, which caused stocks to plummet. According to the US Treasury, about $200 billion left the country from since last August when the bank forced that 2% devaluation.
Even though the Yuan is trading more, it could speed up the Yuan's currency decline. If this happens, it would only make it that much harder for Chinese businesses to pay off any debts. It would also encourage domestic investors to send more money out of the country. The country's capital is resilient and doesn’t want to give up complete control regardless of the success the market reforms have been since the 70s.
Last September, Beijing started to buckle down on how much cash Chinese citizens can take out from overseas ATMs. This is in response to the amount of capital being poured out of the county. Analysts see this as an unwise move from the Communist Party. Managing director at Haitong International Securities, Andrew Sullivan mentioned that the country must look at a different avenue if they truly want to ease the many concerns regarding the market crashes. He said at the end of the day, the only thing it projects is the market being better off running in a free market way. Sullivan added that the country is and has always been a command economy.
Nevertheless, nobody can have a command stock market. It seems as if most of the risks the country has been doing has not been helping them much because funds continue to fly out. According to a report, from the Institute of International Finance, it’s believed that there are $676 billion left in the world's second-largest economy. China continues to experience a slow economic grown as the stock market remains in turmoil. Economists believe that this is not the end, and the Yuan will only continue to plummet, possibly by another 3%, from the current levels by the end of this year. Of course, it is only a projection, but it may be a likely scenario for the country if a positive change does not occur to impede or possibly begin to reverse it.