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Where next for the Chinese economy as it deploys tanks and troops?

Protests in China recently expanded in multiple cities due to ongoing lockdowns and resulting deaths from fire and sickness. This could further damage both the currency and the economy.

Time to short the Chinese yuan? Source: Bloomberg

The Chinese economy appears to be slowing down because of the implementation of ‘20 optimised control measures’ demanded by Beijing.

These control measures recently prevented fire services from reaching a building on fire and several people died. Thousands protested.

The Chinese Communist Party (CCP) responded with tanks and troops, declaring in its English Language mouthpiece, the Global Times, that political and legal organs should ‘resolutely crack down on infiltration and sabotage activities by hostile forces and illegal and criminal acts that disrupt social order.’

The protests are unlikely to have a substantial impact on government policy.

While the rest of the world’s politicians were able to pivot from Covid-zero to pandemic management, Xi Jinping and the CCP appear to have invested in a long-term battle against Covid.

This could have a severe impact on the economy. There are several indicators suggesting the economy and currency could weaken more than they already have.

  • Interest rates are now lower than in the US
  • Major parts of the economy are slowing
  • The CCP is deliberately shutting down parts of the economy

Interest rates are now lower than in the US

The benchmark 10-year US government bond yield hit 3.70% on 29 November, compared to 2.91% for the Chinese 10-year government bond. This is the reverse of where it was at the beginning of the year when the US 10-year was 1.87% and the Chinese 10-year yield was 2.77%.

The problem with this is that international money flows to the stable currency with the highest return. While the Chinese yuan (CNY) had a higher yield than the USD, China was able to peg its currency to the USD. However, with lower interest rates, the CNY is less attractive and has fallen by 10.8% against the USD year to date as of 29 November.

If China maintains this low-interest policy, the CNY could continue to fall against major currencies.

Major segments of the economy are slowing

According to Bloomberg, Volkswagen halted production at a joint venture plant in Chengdu and two production lines at its factory in Changchun. Honda, Toyota and Yamaha have also been affected.

Protests at the world’s largest iPhone manufacturing plant appear to have further disrupted production, with Apple revising its production target down by a further 3 million iPhones. This is the second downward revision of 3 million.

In addition to manufacturing, China’s enormous construction industry appears to have slowed and could slow further if this analysis is accurate. As construction comprises about 7% of the entire Chinese economy, a slowdown in construction could have significant flow-on effects throughout the economy.

Trade also appears to be slowing down, with exports down 0.3% in October compared to a year earlier and imports down 0.7%. This is a stark contrast to the 4.3% increase that analysts were expecting.

The CCP appears to be targeting tech companies

The CCP targeted China’s leading entrepreneur, Alibaba founder Jack Ma, after he appeared to criticise regulators. Alibaba was ordered to sell off its media interests and later received a $2.8 billion fine. Regulators also prevented his Ant Group IPO and issued another billion-dollar-plus fine to Ant.

The founder of Alibaba, Jack Ma, was targeted by the CCP.

Alibaba shares fell more than 71% in the two years to 29 November 2022.

The CCP also appeared to target gaming giant Tencent, limiting minors to just three hours of video games per week.

In addition to tech, the CCP has also largely closed down some sectors of the economy, such as academic tutoring. Tutoring is now banned for students in years 1-9 and is only allowed on school days for senior students. This was a USD 124 billion industry in 2019, according to a report by Oliver Wyman.

How to profit from a weaker yuan and economy

If the Chinese economy continues to slow down, and the above analyses are correct, Chinese stocks could further decline in value in Australian dollar terms.

Should they do, the VanEck Vectors China A50 ETF (ASX:CETF) could fall in value. This ETF holds shares in the largest 50 companies listed in China and is designed to represent the performance of these companies in the Chinese market.

Take your position on over 13,000 local and international shares via CFDs or share trading – all at your fingertips on our award-winning platform.* Learn more about share CFDs or shares trading with us, or open an account to get started today.

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