While the economists talk recovery, the Chinese are “hoarding dollars”
Story: Is China’s economy on the path to recovery? There’s been a lot of reporting on positive economic data releases from the country, but the financial situation still looks quite bad. Chinese businesses are “hoarding dollars because they expect their own currency to weaken”, according to Reuters. Dollar-hoarding is universally a sign that the sense of heightened risk, “bad juju”, “negative animal spirits”, whatever, is still entrenched in the economy.
- Incidentally, this can cause a vicious cycle whereby fears of a weakening local currency cause demand for the currency to weaken, thereby depressing its price and – well – making it weaker. Foreign currency deposits have climbed by about 7 percent to $832.6B since September. The government has tried financial repression measures – like capping dollar interest rates at major lenders at 2.8 percent, but money is still leaking out. This is reflected in the price of the Yuan – at 13.81 cents, it’s higher than the 17-year low reached a couple of times in 2023 of 13.61 but struggling to stay there.
Yuan/US Dollar exchange rate with 17-year low marked
- In 2023 the country saw its first net outflow of foreign investment since China joined the World Trade Organization in 1991. If and when that reverses, the Yuan will strengthen against the dollar. And frankly, that will be good for just about everyone on the planet.
Signal: Both the economy and the financial system in China have yet to hit rock bottom.