China's currency is set to fall sharply in 2017, triggering turmoil
in global equity markets and causing huge pain for commodity-dependent
countries such as Australia, according to leading Beijing-based research
analyst, Anne Stevenson-Yang.
"The drama for the Chinese monetary
managers is the situation with the currency," she said in an
exclusive interview with The
Australian Financial Review.
"They
tried hard in 2016 - and were successful for a time - in fostering the
expectation that the exchange rate might bounce up and down and that the
economy had bottomed.
"But
now there's nobody who doesn't think the yuan is going to depreciate. And if
there's an expectation that the currency is going to continue to fall, everyone
is going to continue to try to take their money out."
Stevenson-Yang, a co-founder of J Capital
Research, said that if economic growth were more robust, China could continue
to run down its foreign currency reserves down to zero in order to defend the
currency.
"But that's clearly not what China wants to
do, so letting the currency float is inevitable."
She
added that China is reluctant to allow the currency to float at present for
several reasons.
"It
would destroy the Chinese economy's chances of growth, and growth is very
important politically. It would crash stock markets internationally, and it
would destroy the commodity economies - it would have a lot of ugly effects.
"But
I do think that it is inevitable. And the currency will float down to 10 or so
to the US dollar when the time comes [the yuan is trading at just under
seven to the US dollar]. And this will cause a nasty reaction in
markets."
Despite the shock waves a sharp fall in the yuan
will trigger, Stevenson-Yang said that a steep depreciation was likely to occur
this year. She noted that Chinese authorities had tightened domestic monetary policy in an
attempt to stem capital outflows, but that tighter liquidity had led to a spike in corporate defaults.
"I
don't know what other options there are. They basically have the choice of
allowing the yuan to fall, or to allow defaults domestically.
"Defaults
have been increasing because of China's attempts to tighten monetary
conditions. But once they let the currency float, they'll be able to flood the
economy with cash and avoid defaults."
Stevenson-Yang
said that Beijing's decision to float the currency will have major
ramifications for commodity exporters, such as Australia.
"The yuan will go way down before it
corrects. How much iron ore will Chinese steel producers buy if it becomes 20
to 25 per cent more expensive to buy, especially since the steel industry is
already losing a ton of money?"
She
predicted that the Chinese steel industry eventually will be forced to shrink.
"Ultimately
Chinese steel output will fall back to 2008 levels, so that it will produce 550
million tonnes of steel annually, instead of 800 million tonnes," she
said..
"And
that will be a big shock to Australia. Nobody wants that to happen,
particularly not China. But, ultimately, it has to happen."
Stevenson-Yang said that China's tighter monetary
conditions were already being reflected in a steep slow-down in the country's
property market.
"You
have to remember that in the primary market, large developers aren't permitted
to go bankrupt. It's always in their interest to freeze sales, rather than to
sell at lower prices. And in the secondary market in the big four cities,
people hold on to their properties, because they notice that prices in the
primary market aren't dropping.
"So
what happens when the public view of housing prices is negative is that markets
freeze, and that is what is occurring now."
Stevenson-Yang
said that when the Chinese currency depreciates "it has to fall quite a
bit in order to impose such a big cost that people decide that it's better to
hold their money domestically.
"There are a lot of people sitting on
property they haven't sold, or who have sold and have their money in the bank.
Or they're in Canada or Australia and haven't changed their money yet, because
they're satisfied with the returns on their investments in China.
"But
if they see the exchange rate falling sharply, they'll panic and try and get
their money out. And that's why the yuan will overshoot on the downside."
Is
Stevenson-Yang worried that US President-elect Donald Trump's hard-line stance
on China, including his threat to label the country a currency manipulator,
will prompt retaliation from Beijing?
"It's
very hard to say", she replied. "I always figured what would happen
was that China would wait until after the [January 20] inauguration to bribe
Trump.
"For
instance, [Chinese banking giant] ICBC is the biggest tenant in the Trump
Tower, and they could double the tenancy fees. Or else they could offer
him a couple of hotel deals.
"And
within a few weeks of the inauguration, mainland China would be Trump's best
friend who could help solve our infrastructure problem by investing in US
public/private partnerships."
But,
she added, "the problem is that Trump doesn't understand US international
relations, and he might have stumbled into creating problems that he may not be
able to retract from."
Source:Introtrade