Fears of a housing bubble. The Shanghai stock market crash. Disappointing economic data on exports and plunging auto sales. And now this.
A few years ago, China’s move to devalue its currency would likely have been seen as a positive development. The International Monetary Fund (IMF) welcomed the August 11 news that China had made a step toward a less tightly controlled currency but said the country had far to go “as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets.”
But while the IMF has expressed cautious optimism, the new policy has also put China’s economic performance under the microscope.
“The big issue is the signal that it sends about the weak Chinese economy, and that is bad news for Canada in terms of export of commodities and raw materials to China,” said Michael Devereux, a professor at the University of British Columbia’s Vancouver School of Economics. He noted that the actual currency devaluation has been relatively minor.
“Demand for pretty much everything that’s imported into China is likely to slow,” said Sherry Cooper, chief economist for Dominion Lending, “which is why commodity prices have fallen once again and, most importantly for Canada, oil prices are down.”
While China’s economic growth once clipped along at 10% or 11% a year, in the last year and a half the government has struggled to keep growth at a targeted 7%. The country has struggled to make the transition from a manufacturer and exporter to an economy where a larger share of growth is derived from household consumption. Recently, households have been encouraged to invest in a bubbly housing market and volatile stock market.
“There’s a huge excess of construction in China,” Devereux said. “They have all these empty houses, empty cities, they had this gigantic stock market bubble which has gone into reverse, and they’ve only prevented a complete collapse of the stock market by shutting down trade in a bunch of major listed corporations.”
In July, Chinese exports dropped 8%. Auto sales, a stalwart indicator of consumer confidence, fell to their lowest level in 17 months, according to Bloomberg, with many retailers offering steep discounts and potential customers holding off for lower prices.
“With the fall in the local stock market, you’ve had a really big fall in domestic consumption,” Devereux said. “The only way China can continue to grow long term is if they get their households and private citizens spending more, but now it looks like they’re cutting back dramatically.”
China’s government hopes a lower currency will boost exports.
But Devereux said the yuan would have to depreciate much more against the U.S. dollar for that to happen.
While a report from Quartz showed the stock price of luxury brands such as Burberry, Ferragamo and LVMH took a hit on April 11, less glamorous imports will also become more expensive.
Western Canadian provinces have felt the most pain from the global drop in commodity prices, and this latest development will be more bad news for producers of metallurgical coal, pulp, ores and oil.