China needs to prevent a large slide of the yuan’s exchange rate, appropriately cut interest rates and stabilise the property market to help boost its weak domestic demand as it can no longer count on high export growth to drive its economy, according to a leading economist.
“High export growth is unsustainable,” Lu Ting, chief China economist for Japanese investment bank Nomura, told a conference in Guangzhou arranged by the Guangzhou Development District Holding Group and the Shanghai-based China Chief Economist Forum think tank on Thursday.
The yuan has come under renewed depreciation pressure since the start of the year, and has weakened by more than 2 per cent against the US dollar.
But early on Friday afternoon, China’s onshore yuan surged past 7.2 against the US dollar to a high of 7.194, which was the strongest level since May 3.
“At this rapid rate of growth, and at this low level of price, it will definitely be targeted by other countries,” said Lu, adding that Republicans in the United States have already advocated for a 50 per cent tariff on Chinese imports as part of the 2024 presidential campaign.
Given the serious trade imbalance, if the yuan is to depreciate a lot or very rapidly, it will not be conducive to resolve the trade imbalance
Lu also expected global trade imbalance would continue, with China and US running trade imbalances.
China’s trade surplus – it exports more goods than it imports – stood at US$99.05 billion in June, representing the highest since records began in 1981, while the US trade deficit – it imports more goods than it exports – stood at US$96.8 billion in June.
“Given the serious trade imbalance, if the yuan depreciates a lot or very rapidly, it will not be conducive to resolve the trade imbalance and it will not be conducive to managing relations with other countries,” added Lu.
“Also it is not conducive to steadying domestic demand, given it’s already dragged down by instability in capital and property markets.”
Dong Zhongyun, chief economist at AVIC Securities, also warned that there would be more uncertainty to China’s foreign trade should Donald Trump win the 2024 presidential election.
“China needs to step up to boost domestic demand,” Dong also told the conference in Guangzhou.
“If there are more restrictions and sanctions, China’s economy can still be maintained.”
Meanwhile, Lu said an “appropriate” amount of interest rate reductions would help to bring down rates on outstanding mortgage loans to ease the pressure on homeowners.
“One lesson we can learn from the US Federal Reserve when it comes to maintaining the economy is to steady the US housing market,” Lu said, referring to the US central bank’s handling of the subprime mortgage crisis.
“We should encourage childbirth, and we should provide such a subsidy to the poorest people, the lowest-income group,” Lu added.