Signs of trouble in China are to be seen in the Yuan ( Renminbi ) rally

As 2017 opens we find ourselves regularly looking east and today it is the turn of China to attract our attention. There is much going on both above and below the surface but let us begin with the good news part. So far the Chinese economy continues to grow if the Markit business surveys are any guide and it looks as though there has been a pick-up. On Tuesday we were told that the manufacturing sector was doing well.

Manufacturing companies in China reported the strongest upturn in operating conditions since January 2013 at the end of 2016. Production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work.

If we focus in on reported output then the figures were even better.

Notably, the rate of output growth accelerated to a 71-month high, with a number of panellists commenting on stronger underlying demand and new client wins. This was highlighted by a sustained increase in new business during December

There is always an oddity in the Chinese numbers and what I mean by that is small PMI reading changes – the latest number was up to 51.9 – seem to have a much larger effect than elsewhere. For example the official manufacturing statistics show growth of around 6% in 2016 from PMI numbers that in the western world might indicate 0.6% growth.

The two worries in the report were a fall in employment which is odd with such output growth and a familiar rise in input costs of which the symbol is the higher price for crude oil.


This morning there was good news to be found here as well.

The headline Caixin China General Services PMI was up 0.3 points from a month ago to 53.4 in December. The sub-indices of new orders, input costs and prices charged all went up.

This meant that the overall picture was positive as well.

Moreover, the Composite Output Index posted up from 52.9 in November to a 45-month high of 53.5 at the end of 2016. China ended 2016 on a positive note, with both manufacturers and service providers seeing stronger increases in business activity compared to November.

Thus we see some good news and the likelihood that the official economic target of 6.5% economic growth will be declared seems high.


Here is one clear problem if you will forgive the malapropric effect of the word clear in these circumstances. Over the holiday break I noted pictures sent from China that were reminiscent of the film Blade Runner in the way that the air was polluted. Added to it was this from mrtoga yesterday in a reply to the Financial Times.

I am sitting in Beijing today and the PM count outside is at 529.  Might be the most hazardous day of this winter.

He seems to think that Shanghai is better although some have replied from there that they are not so sure! We need to find a way of putting such a level of pollution into the GDP (Gross Domestic Product) numbers as a subtraction and not as an addition ( via any clean- up costs). What is the price of having to do this?

How realistic is this?

Whilst we should have a slice of humble pie due to problems with western data there has to be an issue with declaring 6.5% GDP growth with this. From the Financial Times.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

So as the demographic decline begins to build-up we are simultaneously seeing high rates of growth? Productivity must be surging as opposed to the malaise seen by the capitalist imperialists.


The numbers from the FT tell their own story as ever more seems to be required to keep the game alive.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

The Monetary System

We are seeing issues arise this year or more accurately a continuation of past ones. Let us start with the value of the Yuan/Renminbi today. From Bloomberg.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

The yuan gained 1 percent at 2:53 p.m. in Hong Kong, taking its two-day move to 2.3 percent, the most in data going back to 2010.

There are two Chinese currencies the onshore and offshore and this squeeze has widened the gap between them. What we are seeing is an attempt by the Chinese authorities to “burn” those who are in their opinion trying to push the Yuan lower too quickly. There have been various official moves of which the first warning sign was the change in the trade-weighted basket from 11 to 24 currencies then others appeared.

Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency………Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

Higher Interest-Rates

Some chilling numbers are being reported by Bloomberg.

Overnight yuan deposit rate jumps to 80% in Hong Kong

Actually Reuters have it at 96% but a lot of care is needed with annualised overnight numbers. But as we return to earth we do note a difference to the falls we saw at the end of the year in much of the western world due to in essence a lack of demand for money.

In other signs of yuan scarcity, HSBC Holdings Plc raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily……

In a world where it is news that US Libor has reached 1% that is relatively high.


Some of what we are observing is normal for China in that in the gap between our New Year and their they squeeze the exchange-rate. However whilst some of the economic signals are good there are clear dangers in doing this sort of thing. Whilst China may be happy to punish foreign currency speculators there are problems with affecting borrowers with higher interest-rates. The lesson of the credit crunch era is that such things can have big impacts.

Meanwhile it would appear that I am not the only person wondering ( see my post on the 29th of December) about the involvement of Chinese capital in the recent rise and rise of Bitcoin.

Capital flight anyone? That only means that the current Yuan rally looks set to be a type of Pyrrhic victory.

TipTV Finance

Here are my views on the Bank of England from yesterday.






11 thoughts on “Signs of trouble in China are to be seen in the Yuan ( Renminbi ) rally

  1. Chinese economic numbers mean exactly what the authorities want them to mean (to quote Humpty Dumpty) and should be treated with caution. More interesting, is to try to work out why they put out these numbers and what the story behind the numbers might be. Maybe things are actually not as rosy as they appear on the surface? worried about a crash in assets? It would be logical to reassure everyone that all is well whilst reigning in outflows if in fact all is not well!

    • Hi Pavlaki

      There have been various efforts to look at other Chinese numbers ( electricity consumption for example) to try to get a more unbiased picture of economic growth but they cottoned onto that! As to the currency I await their next move. I think they have to try again tomorrow to end the end consistently but what next and indeed at what price? That is always the problem with central planning…

      • That’s easy Shaun. Increased automation requires lending from Banks to businesses to afford the expensive machinery. We haven’t had that in the UK or Europe for a long while. Plus since manufacturing is such a small part of our economy it won’t make as big a difference as in China.

  2. I cannot help wondering whether (when?) China will go down the Japan path. I am old enough to remember when the world could see almost no way of stopping the Japanese juggernaut. The Chinese seem to have become indebted earlier in the growth phase, but
    1. The idea that growth can be managed with no boom and bust seems an improbable one (after all, they haven’t got Gordon B as chancellor);
    2. Such figures are probably in fact smoothed rather than smooth;
    3. High debt plus an ageing population are not ideal bedfellows.

    • Hi James

      Just before Christmas I had a chat with one of the bankers at the People’s Bank of China in London and he described the bond issues they had been undertaking and why? I replied that whilst neither country would like it that fact is that Japan did that sort of thing 25 years or so ago.

      As you point out there are other similarities too…

  3. Completely off topic, but following up yesterday, I hope that you all will join me in congratulating the three bankers reported in the Times today who shared £37 million.
    Well done them.

  4. The fall in employment combined with a decline in demographics, which you find hard to understand in the context of increasing output is probably due to increasing productivity which you also seem to find hard to believe when juxtaposed to weak western productivity.

    Have you considered that China is still first and foremost a manufacturing nation whereas the West these days tends to be service oriented with the exception of Germany and to a lesser extent the US? It is much easier to achieve production efficiencies in manufacturing than services.

    There are a couple more aspects to the current Yuan appreciation:

    1. As it strengthens against the dollar in which most commodities are priced this will help choke off some of the commodity price rises for Chinese manufacturers.

    2. Equally chinese manufacturing exporters will struggle to maintain growth due to the strengthening Yuan as their products increase in price in foreign markets and help provide a further inflationary push in Western economies.

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