Big Trouble in Little China

Recently China reported a larger than expected trade deficit – the numbers weren’t pretty. Exports grew by only 6.9% compared with 14.3% back in the December quarter while imports grew at 7.7%, down from 20.7% in the December quarter. This resulted in a trade deficit for January & February 2012 of over US$4billion compared with less than US$1billion for the same period in 2011.

This has led to much speculation amongst FX traders as to whether China is about to intervene in currency markets to put a halt to the Yuan’s rise. The Chinese view is that with a large and growing trade deficit the Yuan should no longer be under pressure from US authorities to increase. However because China has a huge trade surplus with the USA – the US policy will undoubtedly be for further increases in the Yuan.

Given that the Yuan is not easily tradable by FX Strategists – why bring this up? Well for one, what China does has implications for FX markets right across the board. As Louis Gave, from research group GaveKal, recently remarked: Chinese Yuan intervention could “lead to a pullback in risk assets, because markets will be in doubt about the true intentions of Chinese policy: vigorous mercantilism, tactical volatility or an adjustment to a strong-dollar world.”

There is a lot to be concerned about in respect of the Chinese economy – however for the optimists there is always one saviour. And the saviour ironically happens to be the same as what others consider the curse!! Yes – you guessed it - the Chinese Central Government! The government is continually highlighted as being ready to step in and “support” growth. [insert your word of choice here: property prices, lending, construction, domestic consumption!!] The question on my mind is how does the Chinese government keep funding this “support”? Rarely, if ever do the economists mention this.

What happens may be the stuff of crystal balls – however for a nimble and active FX trader who stays abreast of news flow or for a deep thinking FX Strategist who can determine just how the economic results will play out and is prepared to back their call for what could be a significant time frame – then profitable results hopefully await.