Forex Investment and Currency Trading

Macro-economy

After six years of strong growth, China policy makers are bracing themselves for much tougher times. The economy has been hit by an external demand shock, the effects of domestic tightening in H1-2008, a commodity boom and bust, and a housing market slump and price correction. By the end of 2008, some 20mn had lost their jobs in the export sector, reportedly bringing total unemployment to around 40mn (8% of the labour force) – and rising.

Since September 2008, the government has loosened policy aggressively, cutting interest rates and freezing exchange rate appreciation (at least against the USD). A fiscal stimulus package has been prepared and may now be getting some purchase. It is dominated by state-sponsored infrastructure projects (electricity grid, railways, low-cost-housing, etc.), with support also being offered to exporters and some industries. Bank lending started the year very fast. However, there are questions as to how long this can last. A limited policy response in the real-estate sector, plus an affordability problem, means that residential property is unlikely to see a rapid turnaround. The stimulus package is investment-heavy, and light on consumption-targeted measures like tax cuts. Middle-class spending has clearly slowed since the Olympics, but has not collapsed as in many of the G7 economies – retail sales continue to be pretty strong in the central and north eastern regions.

Exchange rate

The CNY is still undervalued on a real basis, but it did appreciate by 15% on a real basis in 2008, when other Asian currencies weakened. That said, currency appreciation is politically difficult in this environment, so market analysts expect stability against the USD until H2-2010. Will Beijing devalue? This is a low-probability event. If Beijing did choose to devalue, the rest of Asia would likely sell off, and it would also heighten tensions with trading partners including the US. An even more undervalued currency could well encourage hot money flows back into China in H2-2009. So, economists believe that China will ensure exchange-rate stability for 2009-10, and do everything else it can (including more VAT rebates) to support exporters. Once the export sector has seen a resurgence in demand, the currency’s longer-term appreciation can be allowed to continue.