Salient to Investors:
Vincent Ho writes:
China has kept wages low through monetary policy to attract capital investment from manufacturers, thereby exporting deflation as low labor wages keep prices of manufactured goods lower.
China’s central bank will intervene to keep inflation relatively low and stop any significant deflation that would curtail economic growth. Periods of significant inflation are likely to be over in China, meaning appreciation of the renminbi will continue, barring any significant worldwide economic slowdowns.
The US can benefit from renminbi appreciation because first the US would find it easier to pay off its mountain of debt and second, US exports would increase.
Short-term, the renminbi will stay where it is because of conflicting pressures:
- It has to remain relatively weak to a stronger dollar and a weakening yen – China’s economy still heavily relies on US imports.
- China relies on Japanese imports so an appreciating renminbi would deter Japanese consumers.
- The renminbi needs to remain relatively strong to stabilize China’s financial market and protect the savings of a very large rural population, decrease incentives for capital flight, and maintain faith in the renminbi for investors.
Chinese growth will slow. pushing back the date of overtaking US GDP to 2025 from 2017.
China will grow 7.5% in 2013. Jiming Ha at Goldman Sachs estimates growth to slow to 6% annual until 2020 due to a slowdown in the investment activity cycle, and the IMF estimates growth at 8.5%.
The renminbi will appreciate over the coming 5 years and for the long-term. The renminbi is much weaker than the dollar because its economic model currently favors exports over imports. Household consumption will increase as China’s central bank pursues monetary policy favoring consumers over exporters.
World Bank data shows China’s consumption at only 34% of GDP in 2011 versus 55% for Japan in 1980, since when the yen has appreciated well over 110% to the dollar and consumption increased to 60% of GDP in 2011. In 20111, household consumption was 70%, in the US, 74% in Greece, and 60% in Indonesia.
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