China's Waning Currency Reserves And Sinking Currency Are Affecting Its Trade Balance And Economic Growth Will Falter

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Includes: CHN, CN, CNY, CXSE, CYB, FCA, FXCH, FXI, FXP, GCH, GXC, JFC, MCHI, PGJ, TDF, XPP, YANG, YAO, YINN, YXI
by: D. H. Taylor

Summary

China's balance of trade went negative last month.

China's exports are also diminishing.

Simultaneous depreciation of yuan will push export value lower.

China has some structural problems with their economy. Too many Chinese are sending money abroad to invest elsewhere. That is pushing the yuan lower and forcing the Bank of China to defend its currency, depleting their reserves. The problem is extending to the trade numbers and this will perpetuate a major problem with the yuan; it will continue lower.

China has been trying to defend their currency as money has been flowing out of the country. There is a major real estate issue in China and it comes with prongs. First, there is likely a bubble. The country built too much housing too fast. The Chinese government has put up thresholds to keep real estate purchases at bay to prevent the bubble from growing too unmanageable levels. Prices are slightly waning, but that may be the start of something entirely bigger. The housing index has been slowing moderately in response to the government's actions, but it is still on the very high end:

In the meantime, any Chinese wanting to buy real estate has been sending money abroad for their purchases. Real estate markets, such a s Seattle, have been greatly affected by the surge of buyers. There is such a push to buy real estate that some of these purchases have been site-unseen.

The real problem is the amount of money flowing out of China: Too much. The problem is so bad that the Chinese have spent about$1 trillion USD of their formerly $4 trillion in reserves.

The country lost 25% of their reserves in about 3 years time. Another 9 years, given the same pace, 100% of their currency reserves will be depleted.

And, as more and more individuals sell their yuans for dollars the problem will continue to get worse. Here is the CNH to USD (Inverted for visual clarification).

The problem with their currency being sold off is that it is affecting their trade balance and exports. As the currency depreciates the value of the good sold depreciates. The economy is in bad need of an economic boost. Earning less for what they are selling is not going to help the problem, but exasperate it. That will push the economy lower and more money will leave the country in search of a more secure investment environment.

The trade balance has softened overall from its highs of 2015:

Exports have been weaker than expected verses imports, this from the lower currency rate:

This duality in problems is going to keep the Chinese economy in an unstable situation. If the government succeeds in taming the housing market that basically means they have burst a bubble. From that there will be economic drawdowns based upon loan losses from housing and businesses. This is a lot like what happened to the rest of the world during the financial crisis of 2008, but not to suggest that China will experience the same type of economic calamity. However, some are already saying that is in the works.

I am more inclined to believe that the country will experience a prolonged economic down-cycle; I can see another Japan-style economy in the making. I see continued anemic economic growth. The country is saddled with massive debt from all of their government expansion. On some measures, the total of personal, business and government debt has reached 400%. Three will be defaults from this at some point. This will be a significant drag on economic activity along with the withering currency.

And, anyone with yuans will be sending their currency abroad to invest elsewhere. The Chinese yuan is very likely to go much lower over the course of the next several years (Pushing this chart, USDCNY, upwards).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.