A sharp fall in the yuan, and a trade war with the US: China’s nightmare economic double whammy, according to Deloitte

A sharp fall in the value of the yuan to 7.5 per US dollar and a potential trade war between the US and China have been highlighted as the major challenges faced by Asia and the mainland this year, according to Deloitte.

But the accounting and consulting giant also expects that double-barrelled, worst-case scenario highly unlikely, and that overall economic growth globally will be better than expected as many indicators point to a lift in world trade this year between China, India, and the US.

“The largest risk this year is a sharp depreciation of the yuan which could affect the region’s recovery.  The current investment market has already priced in the expectation of the yuan falling to 7.2 or 7.3 yuan per US dollar and as such, the yuan would have to fall to 7.5 yuan per US dollar to shock the market,” Sitao Xu, chief economist and partner, Deloitte China, told a briefing to introduce the first edition of “Voice of Asia”, a series of reports from the firm about opportunities and challenges in Asia.

The yuan lost 7 per cent of its value last year which is the biggest annual fall since records started in 1994.  It currently trades at around 6.9 yuan to the greenback.

“The continuing devaluation of the Chinese yuan is necessary, though how the Chinese government manages it will be key,” Xu said.

“If it’s too aggressive, other Asian currencies may also fall. This could lead the US President-elect Donald Trump following through on his protectionist rhetoric which could start a trade war.”

Xu said the other challenges would be what he’s calling the “3Ts”– Trump, trade, and tariffs.

During his election campaign the incoming president vowed to use tax reforms to encourage Americans to buy US domestic made goods and warned he would impose hefty levies on Chinese imported products. 

Xu said if Trump imposed tariffs on Chinese imports, China would counter with the same on US imported goods to China.

The two countries could try to avoid such a full-scale trade war, by only adding tariffs on certain goods such as steel or aluminium.

Chris Richardson, Deloitte’s access economics partner, adds: “Overall, global and Chinese economic growth in 2017 will be better than you think as figures from new and existing organisations show improvement.

“The new generations of youngsters in China and India are more willing to borrow money to go shopping. They are also more tech savvy. These new generations of customers will drive consumption and economic growth in Asia.”

Allianz Global Investors’ global strategist Neil Dwane is also positive on China this year.

“It’s time for investors to look at China. As Donald Trump assumes the presidency and the Federal Reserve raises interest rates, it will lead to global economic growth and this is going to help China and other emerging markets pointing towards a growth era.

“China, in particular, presents new opportunities,” Dwane added in a briefing on Thursday.

He said commodities, retail spending and tourism numbers were all expanding in the mainland.

“Travellers don’t find it easy booking hotel rooms at the mainland’s main attractions. The mainland economy is being driven by a growing number of middle-class earners who want to travel. Tourism as a sector looks positive.”

Not all economist, however, are so optimistic.

Adrian Mowat , JPMorgan’s chief emerging markets and Asia equity strategist, told the South China Morning Post that there is still a lot of uncertainty surrounding Donald Trump taking office this week.

“Policy uncertainty is high. It makes sense to try to understand the potential risks,” Mowat said.

“President-elect Trump’s trade teams have written on its international trade costing US jobs. Exporting to America is likely to be harder. This could be a source of tension with China,” Mowat added.