Welcome to the grown-ups’ table, China!
If all you know about China is that it has the world’s largest population and Great Wall, then you need to read up, playa!
China was first recognized as a unified country back in 221 BC, ruled by the Qin dynasty. No, big, fat pandas weren’t kung fu masters back then; at least we don’t’ think so. Since that time, we’ve seen many dynasties rise and fall until the People’s Republic of China was establish in 1945.
It wasn’t until recently though, that China emerged as a legitimate world power. It boasts world class cities, Olympic gold medalists, and delicious dimsum. Not only is it the birthplace of Yao Ming, it even became the third nation to send a man to space.
From sports, to space travel, to economic might, China is slowly crawling its way up the leader boards!
China: Facts, Figures, and Features
- Neighbors: Korea, Mongolia, India, Japan, Russia
- Size: 3,705,407 square miles
- Population: 1,350,695,000
- Density: 373 per square mile
- Capital City: Beijing (population: 11,716,000)
- Head of Government: Xi Jinping
- Currency: Chinese Renminbi / Yuan (CNY)
- Main Imports: petroleum, copper, iron, steel, machinery, plastics, medical equipment, organic chemicals
- Main Exports: rice, apparel, clothing, office machines, electronic goods, machinery, steel, Yao Ming, Jackie Chan, Apple iPads, Cherry cars
- Imports Partners: South Korea 9.4%, Japan 8.3%, Taiwan 8%, United States 7.8%, Australia 5%, Germany 4.8%
- Exports Partners: Hong Kong 17.4%, United States 16.7%, Japan 6.8%, South Korea 4.1%
- Time Zone: GMT+8, GMT+7, GMT +6, GMT +5, GMT+4
- Website: http://english.gov.cn/
It wasn’t always this way though. For the longest time, China’s economy was secluded from the rest of the world. It was only during the formalization of the modern government, the People’s Republic of China, that China started opening its door to the rest of the world.
China hit a humungous growth spurt in the 1990s and 2000s, as the nation posted ridiculous double digit growth. This put its booming economy at the forefront of emerging market growth.
Interestingly, the growth has been spurred on by the agriculture and industrial industries, which account for more than 60% of the total GDP.
Export trade has also played a major factor, with the undervalued yuan helping make Chinese goods more attractive in international markets.
Over the past year though, there have been fears that the Chinese economy may overheat. To counter this, the Chinese government has implemented various monetary and fiscal policies to ease the transition to more sustainable growth levels.
Monetary & Fiscal Policy
The People’s Bank of China (PBoC), which is located in Beijing, is in charge of China’s monetary policies. Aside from controlling interest rates and reserve ratio requirements, the PBoC is also tasked with regulating financial institutions in mainland China.
Now here’s a little piece of trivia for you: Did you know that the PBoC currently holds the most financial assets among all the public financial institutions in existence? It is currently holding over $1.3 TRILLION USD worth of Treasury bills, and not to mention all the other bonds from other countries that’s on its balance sheet!
This shouldn’t be too surprising considering how China managed to trump most nations in terms of economic performance!
Another interesting factoid about the PBoC is that its interest rates used to be divisible by 9 instead of 25 a few years back. This was because the Chinese based their rate system on the abacus, which was set in multiplies of 9. Can you imagine reading about a 0.18% hike in benchmark rates?
Recently, however, the PBoC decided to let go of this traditional practice and adopt the convention of hiking or cutting interest rates by 0.25% increments. In fact, the PBoC is pretty notorious for making aggressive interest rate changes depending on how the Chinese economy is faring.
Aside from the interest rate, the PBoC also has the ability to adjust the reserve ratio requirement (RRR) for banks in its monetary policy arsenal. You see, the RRR refers to the amount of cash Chinese banks are required to hold in their vaults. By varying the ratio, the PBoC is able to control how much money is in circulation and keep inflation within their target levels.
Getting to Know the CNY
The yuan is the primary unit of Chinese modern currency or renminbi. If you’re constantly getting confused between yuan and renminbi just as Dr. Pipslow often mistakes sugar for salt when making his morning coffee, all you have to remember is that the term renminbi is the official name of China’s currency while yuan refers to the actual units.
Although China is in the midst of reforming its exchange rate policies, the yuan still remains pegged to the U.S. dollar. This means that if the U.S. dollar rises or falls in value, the yuan follows accordingly. As such, CNY isn’t one of the commonly traded currencies in the forex market.
One problem with this peg is that it has caused tension between China and the United States, who has come close to naming China a currency manipulator. Because the yuan is undervalued, haters claim that it gives China an unfair trade advantage and has be the main driver of Chinese growth.
To China’s credit though, it has been gradually loosening the yuan’s peg in recent years. They’ve done so by slowing introducing CNY-denominated bonds in Hong Kong. Word on the street is that big financial players can’t wait to start changing their cash to yuans and investing in CNY-denominated assets.
Important Economic Indicators for the CNY
GDP – This figure acts as China’s economic report card because it reflects how much their economy expanded or contracted (but it’s the former in recent history, and nearly at double digits too!) for the period. This is typically reported on a quarterly basis compared to the same quarter in the previous year.
CPI – The PBoC keeps a close eye on the Chinese CPI report because it reflects how much price levels have changed over a particular period of time. If the annual CPI reading exceeds or falls below the Chinese government’s target levels, the PBoC could wield its monetary policy tools in its next rate decision.
PBoC Interest Rate Decision – As we mentioned earlier, PBoC is notorious for making aggressive monetary policy changes whenever they feel that the Chinese economy is overheating or if it needs more stimulus.
Trading the Chinese Economic Reports
Even though the yuan isn’t a commonly traded currency, that doesn’t mean you can’t make any pips off those Chinese economic releases!
Because China’s economy is so ginormous, its economic events will most likely impact those nations that they are closely associated with. One of these is Australia. China is Australia’s largest trading partner, with the two nations exchanging nearly a hundred billion dollars’ worth of products each year.
With that, Chinese economic data releases tend to impact the Australian dollar the most among the major currency pairs. Strong economic data from China typically indicates that the Chinese demand for Australian commodities could increase while weak Chinese data could hint at a downturn in trade with Australia.
Of course, since China is currently the world’s second largest economy next to Uncle Sam, its economic standing also has a huge effect on risk sentiment. This means that a slowdown in China could reduce traders’ appetite for risk and higher-yielding currencies as they worry about the potential impact of this slump on the global economy. On the other hand, an economic boom in China could be positive for risk as market participants see this as a sign of further growth for the global economy.
More often than not, better than expected economic figures from China lead to an AUD/USD or AUD/JPY rally while weaker than expected results usually trigger an Aussie selloff. PBoC rate decisions are a little more tricky as these depend on prevailing market sentiment, so it’s best to do your homework and read up on Forex Gump’s economic analysis articles to be in the loop!