The importance of China on the forex market is evaluated.
In the 1960’s a common phrase regarding China was that it was a sleeping giant one could not ignore. Well, today it is no longer sleeping. China’s imports of goods are roughly one-quarter of its GDP, well above the same ratio of imports/GDP for the United States and Japan (10 percent). The International Monetary Fund reports that “China
is now the sixth-largest economy, at market exchange rates, and the fourth-largest trader in the world.” China’s increased demand for foreign manufactured goods and raw materials has been particularly dramatic. Chinese imports of both manufactured goods and raw materials have more than doubled over the past seven years. China’s effect on all the currencies will be profound.
Exports to China have risen more than 55 percent since 2000, to $27 billion in 2003 (through August at an annual rate). Among the products that the United States exports to China are: $1 billion in oilseeds and grain (roughly 14 percent of all U.S. exports in this category), $1.3 billion in semiconductors and other electronic components, and $1.5
billion in transportation products (with statistics for this year through June).
One cannot escape the impact of China
China’s currency, known as the Renmimbi, was pegged to the U.S. dollar at a rate of 8.28. On July 21, 2005, China lifted it’s peg to allow for a 2% fl oating the value of the currency. This is an historic change and a prelude to a potential strengthening of the Renminbi The Renminbi is managed by the State Administration of Foreign Exchange
(SAFE). As long as the Chineese prevent the fl oating of their currency they are, in effect, artifi cially lowering their costs of goods as the dollar has fallen in value.
If the Chinese allow their Renimbi to strengthen, it will reduce their competitiveness, raise costs of their manufactured goods, potentially increase their infl ation rate, and have cascading effects throughout the world. The attractiveness of China as a source of manufacturing is also based on the fact that the average wage there is 60 cents an hour.
This attracts capital fl ows and investments not only away from the U.S. but also from Japan and other Asian nations, as well as Mexico. For example, China has surpassed Mexico in production of sombrero’s!
The Chinese impact reaches throughout the globe and its economy has experienced phenomenal growth at rates exceeding an annualized 9%. One example of the Chinese infl uence is that 70% of the world’s shoes are manufactured in China. The importance of this to those interested in forex trading is that the entire world is interconnected. Even
though you can’t trade the Chinese currency, what China is doing affects the whole world. For example, Wal-Mart accounts for 1.3% of the U.S. GDP and obtains most of its manufactured items from China. As China grows and as its private consumption economic sector grows, it will import more and more products from the United States and other countries. For example, Volkswagen Ag announced it will build a new
automotive plant in China and projects producing 800,000 cars by 2008. China has a projected growth rate of 7% per year to the year 2020.
The Asian Development Bank reports that the PRC is the world’s biggest consumer of copper, tin, zinc, platinum, steel, and iron ore; second biggest of aluminum and lead; third largest of nickel; and fourth largest of gold. It is now the world’s second-largest oil consumer and accounted for 35% of the global rise in oil demand in 2003.
Note: Please see Abe’s book “Understanding Forex: Trading to Win” for the remainder of the chapter. Copies can be obtained from the Freebie section of forexhound.com