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Why the yuan will rise, even though China faces a ‘tough economic battle’ in 2019
- Expect China’s fiscal loosening and foreign investment reform to lift the yuan, especially as the effects of US stimulus from last year continue to wear off and a trade war settlement looms
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Lowering the goal for growth in China’s economy earlier this month, Premier Li Keqiang warned of a “tough economic battle ahead”. Only last week, figures showed that Chinese industrial output for the first two months of 2019 hit a 17-year low. It would be easy for investors to be downbeat on China and the yuan, but that might be a costly error.
Admittedly, the timing of the Lunar New Year holiday is likely to have distorted the industrial output data, yet it is undeniable that China’s economy faces challenges. But it is also clear that Beijing has plenty of policy levers to pull and every incentive to do so.
Looser Chinese fiscal policy, epitomised by a raft of tax cuts, will give China’s economy a boost and when Li talks of creating more than 11 million jobs this year, investors should regard that as a serious intent, not political soft-soap.
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“Large-scale tax cuts and fee reductions would affect the government, cutting its own flesh,” Li said on Friday. “This kind of reform is equivalent to turning one’s blade inward and slitting one’s wrist.”
Li’s colourful language makes the point, to markets and beyond, that Beijing is serious.
Elsewhere, although a combination of loose fiscal policy with tight monetary settings supported US dollar appreciation in 2018, times are changing. The sugar-rush effect of last year’s US fiscal stimulus is subsiding while the Federal Reserve has become more cautious about raising interest rates.
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