What does the IMF likes and dislikes about China’s economy?

According to finmarket.ru, the IMF urges Beijing to stop restraining its national currency (the Chinese Yuan) from strengthening. It is reported that all the members of the IMF’s Executive Board share the opinion that a stronger Yuan will help to restore the balance of the country’s economy (in particular, to boost the domestic demand). Strange as it may seem but last year the IMF Board members were divided over the issue.

 

According to the IMF’s report released in late June, the Yuan, which used to be pegged to the US Dollar, is still undervalued by 3-23%. The report says that the Yuan exchange rate is below the mid-term fundamentals, which means that China’s currency has weakened against the currencies of China’s major trading partners.

 

Over the last 12 month the Chinese Yuan has appreciated 5.5% versus USD. However, if to consider the rapidly growing inflation in China, the Yuan has actually weakened against the US Dollar.

 

China’s reaction to the report is obviously negative. The Chinese authorities do not agree with the IMF experts, saying that the Fund undervalues the Yuan. The report says that the negative events in the global economy have affected the developed economies’ balances (especially spending). As a result, China has been facing serious obstacles on its way for financial reforms. The experts of Masterforex-V Academy tried to find these obstacles:

·         China abandoned pegging the Yuan to the Dollar. China unpegged the Yuan from the Dollar in 2005. Over the first 3 years the Yuan appreciated by 21%. During the crisis, from 2008 until July 2010, Beijing managed to maintain the USDCHY exchange rate around 6,83 yuan per dollar. Along with the negative evaluation of the situation around the Yuan, the IMF experts, nevertheless, point out the relative stability of China’s economy. However, at the same time they warn China about multiple risks due to the rapid growth of inflation and bubbles in the Chinese securities market.

·         The IMF’s forecasts. According to the forecasts made by the IMF in 2011 China’s GDP will increase by 9.6%, in 2012- by 9.5%. The rate of inflation in China is expected to grow by 4,7% and 3,3% in 2011 and 2012 correspondingly. The IMF experts assume that the 5.5% inflation rate seen in late May 2011 aggravated numerous social and economic problems in the country. However, if there isn’t any significant price hike in the country’s food market in the short run and if the authorities continue toughening their money-and-credit policy, the inflation will soon reach the top and will start declining in the second half of 2011. The National Development and Reform Commission (NDRC) of the People’s Republic of China share the opinion.

·         China’s rate of inflation. June’s CPI in China gained 6.4% - the record value seen over the last 3 years.  In 2011 the rate of inflation may reach 5%, thus exceeding the government’s forecast (4%).

·         Forecast by Moody’s. By the way, growing inflation is not the only problem seen in the PRC. Earlier this month Moody's Investors Service warned China about a possible cut in the rating outlook for its banking system due to the underestimated volume of loans lent to the country’s local authorities by Chinese banks.  According to Moody’s the volume of such loans is roughly equal to 3.5 trillion yuan (or $540B). According to Yvonne Zhang, Vice President of Moody's, China’s watchdogs well may conceal the real info on the bank risks, which only aggravates the situation along with the absence of an efficient solution. The so-called bad debts make up to 12% of the net lending volume.

·         China’s housing market.  Another problem of the country’s economy is the overheating of its housing market. June’s home sales gained 31% as compared to May, despite the steps taken by the government in order to cool the market. According to Bloomberg, the demand for fixed property is especially high in relatively small towns.

 

The volume of investments in China’s dwelling property increased by 33% to reach 2,6 trillion yuan. During the first 6 month of 2011 the construction of new homes saw an increase as well - 24% or 994,4 million square meters. This year Beijing is going to invest 1.3 trillion yuan in the construction of over 10 million new apartments.

 

Over the first 6 month of 2011 China’s GDP gained 9.6% as compared to the same period of 2010: 20 trillion 445,9 billion yuan (or 3 trillion 160,1 billion dollars). The pace of the country’s industrial growth reached 11%, agriculture - 3,2%, services – 9,2%.

 

The experts of the Department of Masterforex-V trading system have made a forecast for USDCNY:

In early July USDCNY broke the MF pivot and sloping channel, thus completing the downward wave of Weekly 6.5950-6.4570.

After the retracement the downtrend will be resumed in the form of wave 5/A. The forthcoming succession of events will be determined by the direction in which the price will come out of the 6.50-6.4350 range: either breaking below the lower border of the range (the downtrend will be resumed – wave C in the “Hound of the Baskervilles’ patter by Elder/MF) or breaking above the MF pivot and sloping channel (if supported by the AO – the formation of a bullish retracement of the senior wave level). The 2 variants are shown in the picture below:

Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum and answer the question given below:

 

Will the Chinese Yuan become a freely convertible currency within the next 5 years?

·         Yes, it will

·         No, it won’t

·         Your own opinion