Recent news from China has been really ugly.
But what can you expect? They’re trying to fight a trade war against the U.S. – deal with slowing growth – and survive against a stronger U.S. dollar.
And because of these problems – China’s major stock exchanges have really suffered this year.
But – contrary to what the mainstream says – I think things are going to get much worse. . .
For starters – the latest Chinese Manufacturing PMI (purchasing manager index) showed a continued downturn. Both in the NBS and Caixin Indexes.
Clearly the trade-war with the U.S. is being felt. And with little progress in negotiations between the U.S. and China – expect the near-and-midterm to continue being weak.
Now – Unfortunately – this slow down in the Chinese economy and the loss of sales and income are coming at a bad time. . .
Especially for their corporations.
The combination of a slowing economy, a stronger dollar, and a tightening Federal Reserve is putting pressure on indebted Chinese firms.
This is putting China’s elites between a rock and a hard place. . .
That’s because with the trade-war raging on and a tightening Fed – the Communist Party of China will want to ease and help their economy.
The Peoples Bank of China (the Chinese central bank) can cheapen the yuan to try and boost exports. And as I wrote before – the weaker yuan will offset Trump’s tariffs.
For example – if the U.S. places 20% tariffs on all Chinese goods – China simply must devalue the Yuan by 20%. This would offset the increased costs from the tariffs – keeping the price for U.S. consumers unchanged. Basically rendering the imposed tariff worthless.
But the problem with this is Chinese firms have significant dollar-denominated debts. So a stronger dollar makes their debt-burden much harder to service.
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