Weak Chinese Yuan Is a Bad Sign
The People’s Bank of China made a desperate move last Wednesday by forcing the Chinese yuan to a five-year low against the U.S. dollar. It was basically an admission that China’s economic collapse is just around the corner. (Source: “China Fixes Yuan at Five-Year Low Against Dollar,” The Wall Street Journal, May 25, 2016.)
This should hardly come as a surprise. The impending collapse was foreshadowed by a stock market crash last June, followed by repeat performances in August and January. After that, exports fell dramatically and economic growth slowed significantly.
Chinese authorities have tried to slow the excessive amount of debt held by Chinese corporations, but it is too little too late. An economic collapse is at hand.
That much became obvious this week when China deflated its currency to try and stimulate the economy. Not only will China’s tactics fail, but they could also actually deepen the country’s financial crisis.
How so, you ask?
The first thing you need to understand is how China controls its currency.
There are technically two versions of the Chinese yuan, the onshore yuan and the offshore yuan.
The onshore yuan is controlled under the tight fist of the Communist Party. It isn’t allowed to sway more than two percent from a target set by the central bank.
The central bank lowered the onshore yuan because it is scared an economic collapse could throw the entire world into recession. It’s a reasonable fear.
China’s expansion kept the global economy alive after the financial crisis. Now it’s on the brink of a real estate crash that could make 2008 look like a warm-up act. That scenario is not a “what if” scenario—it’s a real, and horrifying, possibility.
Think about it: the United States had a housing bubble when real estate took up five percent of our economy, but China is way past that point. Housing is 15% of China’s gross domestic product.
The country has problems we can barely imagine.
It’s widely known that China has whole cities where buildings are left empty. There is no one to lease them out! They were simply built to stimulate the economy and that isn’t real growth. It’s as hollow as China’s promise to free up its currency.
And that’s supposedly what the offshore yuan is for. It is China’s signal to the rest of the world to say, hey, we’re open, we’re embracing free markets, so come trade with us. But the second any transparency threatens China’s growth…the country manipulates its offshore currency.
Lowering the yuan to a five-year low shows how panicked the Chinese government truly is. China is deathly afraid of seeing its economy crash and burn, so it tries to wrest back the control it promised to give up. A China economic collapse may not be that far off.