Chinese Yuan Slumps Despite Surprising Gain in Auto Sales

The Chinese yuan is slumping to kick off the trading week, despite a surprise gain in new motor vehicle sales last month. Investors are potentially keeping an eye on internal financing struggles and concerns over a renewed trade war between the two largest economies. Despite the coronavirus pandemic shutting down China, the yuan has only recorded modest losses against the US dollar. If the data improves, could the currency test 6.9999?

According to the China Association of Automobile Manufacturers (CAAM), auto sales jumped at an annualized rate of 4.4% to 2.07 million in April, up from a 43.3% crash in the previous month. The market had penciled in a drop of 38%. This represented the first annual increase in 22 months as the economy reopens and hits the reset button. The one head-scratching trend in the report is that sales of new energy vehicles (hybrids, battery-only, and hydrogen) declined for the tenth consecutive month.
CAAM researchers warn that auto sales could still contract 15% in 2020, even if China successfully contains the COVID-19 outbreak.
A new study by the Center for Strategic and International Studies (CSIS), China’s projected purchases of American goods this year will fall short of what was agreed in the phase one trade agreement earlier this year. Study authors forecast that exports of US goods to China could total $60 billion for all of 2020, falling short of the $186.6 billion requirements. Under the provisions of the trade deal, Beijing agreed to purchase an extra $200 billion in US goods and services by 2021, in addition to 2017 levels.
In the first quarter of 2020, US goods shipped to Beijing tumbled 10% year-over-year. The declines were led by slumping energy, commercial aircraft, and soybean exports.
Scott Kennedy, senior advisor and trustee chair in Chinese business and economics at CSIS, wrote in the report that President Donald Trump could adopt three strategies to address the shortfall: initiate a multi-stage resolution, impose penalties, or request China buy more US goods once the economy recovers.
Analysts are sounding the alarm about a new problem facing China: Writing off immense loans from countries that owe China money. Years ago, the Chinese government launched the Belt and Road Initiative (BRI), a multi-billion-dollar infrastructure investment plan that aims to connect China to Central Asia, Africa, and Europe through an intricate network of rail, road, and sea routes.
But while the government has been blasted for forcing countries to accumulate massive levels of debt, the banks have been the ones providing hundreds of billions of dollars in funding to these nations. With the coronavirus pandemic impacting 180 countries and infecting more than four million people, entire economies have been shut down.
This could be an opportunity or a crisis for the financial system and the broader economy. On the one hand, experts are encouraging Beijing to write off these loans. On the other, Chinese businesses could be handed control over joint ventures or repaid with assets.
The Economist Intelligence Unit (EIU) writes:

There is, however, a growing likelihood that Chinese lenders will be forced into broader debt forgiveness, owing to force-majeure clauses or other arrangements.

Widespread debt write-offs could generate a negative feedback cycle that would discourage future Chinese lending activity over the remainder of 2020 (and into 2021).

The USD/CNY currency pair rose 0.27% to 7.0933, from an opening of 7.0741, at 12:18 GMT on Monday. The EUR/CNY advanced 0.23% to 7.6838, from an opening of 7.7606.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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