China’s Bad News Just Keeps Getting Worse



Chinese economic policymakers already had a difficult juggling act before the twin crises of Covid-19 and Russia’s invasion of Ukraine. They were trying to work off a massive increase in financial leverage and steer the nation away from lifespan-threatening pollution while at the same time ensuring sufficient growth to maintain social stability.To get more news about https://www.shine.cn/opinion/2112179662/ china sucks, you can visit shine news official website.

But for President Xi Jinping and his lieutenants, the challenges just keep multiplying.

The latest is how tolerant Beijing should be about depreciation of the yuan. After hitting its strongest mark against the dollar in almost four years last month, the currency has retreated about 1%. Pressure for further declines is likely to mount given a sharp divergence between the U.S. and Chinese central banks.
U.S. Federal Reserve officials have tilted even more hawkish in the past week, with Chair Jerome Powell and several of colleagues saying they could back a half percentage point interest-rate hike in May—a step the central bank never took in the last tightening cycle. Meantime, the People’s Bank of China is headed in the direction of easing, after China’s cabinet called for the adoption of monetary policy tools to sustain credit expansion.

On top of this dynamic, capital-flow data are suggesting some level of concern among global investors about the security of investments in China, given its diplomatic friendship with the much-sanctioned Russia. The Institute of International Finance—an association of the world’s biggest financial institutions—on Thursday reported a surge in outflows of money from China starting in late February, when the invasion of Ukraine began.

Outflows from China on the scale and intensity we are seeing are unprecedented,” IIF economists led by Robin Brooks wrote. “We think these outflows are notable enough to at least raise the possibility that Russia’s invasion of Ukraine may be pushing global markets to look at China in a new light.”

The IIF report came after monthly data showed a record selloff of Chinese bonds by overseas investors for February, according to data compiled by Bloomberg. These capital-account flows offset China’s continuing current-account surplus, which widened during the pandemic as consumers abroad gorged on Chinese imports and Chinese tourist spending overseas evaporated.

The question now is, will Beijing let the yuan head much lower? Doing so would help bolster trade competitiveness. “China desperately needs a cyclical depreciation” in the currency, said Freya Beamish, the head of macro research at TS Lombard and who has specialized in Asia.

The trouble with that is a weakening yuan tends to spur further capital flight. The painful episode of halting a volatile exodus, triggered by a messy devaluation in 2015, has hardly been forgotten. And right now, China has all the more reason to ensure a stable exchange rate: as discussed in last week’s New Economy Saturday, the sanctions against Russia showcase potential vulnerability to China from its deep connections with the dollar-based global financial system, and the value of fostering greater use of the yuan in trade.In fact, Johanna Chua, Citigroup Inc.’s chief Asia economist, said the geopolitical calculus may prove so powerful that China limits its degree of monetary stimulus in order to prevent adding to depreciation pressures. In a note to clients March 21, she highlighted how an increase in the use of the yuan came to a halt after the 2015 debacle.

Longer-term strategic objectives for the yuan “may even constrain the degree of policy easing as a whole,” and incentivize continued zero-Covid restrictions that curb Chinese spending on services overseas, Chua said. That would help to safeguard the current-account surplus, which gives policymakers room to manage the exchange rate.