Weaker Chinese yuan may trigger liquidity shock
ISTANBUL: A weakening Chinese yuan against greenback due to concerns over trade wars may mobilize a liquidity shock, Ben May, an economist at Oxford Economics, has said.
“Neither are we overly concerned by recent Chinese yuan weakness triggering a liquidity shock, and we expect policy makers to intervene if there’s sustained downward pressure,” May told Anadolu Agency.
May said China’s gross domestic product growth forecast for 2018 was revised up to 6.4 percent from 6.3 percent despite increased trade headwinds. He underlined that despite the fact that global trade faces a key risk, a recession was unlikely.
However, May said the risk of a stronger dollar will contribute to a drawn-out weakness in the global economy. “Dollar strength would create a drain on global liquidity, weaken activity and generate risk-off sentiment. All this could further exacerbate dollar strength.”
May noted the global economy’s resilience to global threats and added that ongoing protectionism has yet to cast a shadow on trade and overall economic growth.
“Despite concerns about trade wars and tightening liquidity conditions, we have left both our 2018 and 2019 global GDP growth forecasts unchanged at 3.1 percent and 2.9 percent, respectively,” he said. May said the recent strength in dollar is largely due to weak growth in the rest of the world compared to the US.
“We expect it to go into reverse. In 2018, the economy may record its strongest performance in 13 years, approaching 3 percent growth but trade risks increasing. Rising trade protectionism could inflict significant damage to US economy,” May said.
Threats of a global trade war began with US President Donald Trump’s move in March to impose steep tariffs on billions of dollars’ worth of Chinese goods.
The White House decision on increasing tariffs on goods from China and EU raised concerns about protectionism in global economy and are projected to chance balances in global trade.
Volatility in the global market has risen while the biggest effect was seen in the Chinese market. The Shanghai Composite Index has dropped nearly 15 percent since the beginning of this year. The index started the year at 3,314 points and dipped the lowest level of last two years reaching 2,691 points in July.
In June, US dollar/Chinese yuan exchange rate hit the highest level since end-June 2017 — one dollar traded for 6.8112 yuan–, off by 4.3 percent annually.