Currency competitor: why the recovery of the PRC economy could undermine the position of the US dollar in the world

Since the beginning of 2019, global investors have significantly increased their investments in risky assets. The MSCI Emerging Markets Index - an indicator of stock markets in developing countries - has grown by almost 13% to 1090 points. At the same time in mid-April, the figure rose above the mark of 1096 points. This result was observed for the first time since June 2018.

Simultaneously with the growth of stock quotations in developing countries, experts note a noticeable strengthening of the national currencies of these states. From the beginning of the year, the corresponding MSCI Emerging Market Currency Index added 2.3% and rose to the level of 1,652 points. According to analysts, financial market players have become less responsive to the threats of a slowdown in the global economy and have begun to actively buy risky currencies and securities.

“The risk appetite of investors is growing: the markets feel that the rumors about a possible slowdown in the global economy have been greatly exaggerated,” said Pyotr Pushkaryov, analyst at TeleTrade, in an interview with RT.

According to the expert of the International Financial Center, Gaidar Hasanov, in April, investor confidence reinforced the unexpected improvement in China's economic indicators. According to the State Statistical Office of China, in the first quarter of 2019, the country's GDP growth was higher than analysts' forecasts and amounted to 6.4%.

Moreover, in March, retail sales in China increased by a record over the past six months - by 8.7%, investment in fixed assets added 6.3% for the first time in ten months, and the growth in industrial production was the highest since August 2014 and amounted to 8, five%. At the same time, the unemployment rate dropped slightly from 5.3% to 5.2%.

During the first month of spring, the business activity index (PMI) in the PRC industry rose to 50.8 points. The indicator for the first time since November 2018 managed to rise above the psychological level of 50 points. This is stated in a study of the analytical agency Caixin.

Note PMI index reflects the real state of a particular industry. A value above 50 points indicates a positive economic situation, below 50 points indicates a stagnation of the sector.

As Gaidar Hasanov explained, the published data exceeded investors' expectations from the measures taken by the Chinese authorities to stimulate the economy. We are talking about the actions of the government of China in the field of monetary policy and tax regulation.

In 2018, due to the trade war between Beijing and Washington, China’s growth rate has fallen to a minimum in the last 28 years. According to the State Statistical Office of China, the country's GDP grew by 6.6% against 6.8% in 2017. The value was the lowest since the 1990s.

Chinese job

It is curious that simultaneously with the rise in prices of assets of developing countries, analysts today note the strengthening of the dollar in the world market against major currencies. To date, the corresponding DXY index for the first time since May 2017 is near the mark of 97.7 points.

According to analyst at IC Freedom Finance Alena Sabitova, the dollar appreciation that has been observed today is largely due to the weakness of the currencies of other developed countries. First of all, we are talking about the euro. According to the IMF forecast, in 2019 the growth of the US economy will slow to 2.3%, the eurozone figure will be significantly lower and will be only 1.3%. Against this background, according to Sabitov, investors still prefer the dollar in their choice of major currencies.

Meanwhile, experts believe that by the end of the year, the US currency in the global market may be under pressure. With the improvement of China's economic indicators and the risks of impending recession in the United States, investors may begin to invest more in the assets of developing countries.

“Risk appetite can lead to a loss in the value of dollar assets, which, according to most forecasts, will fall in price by at least 10-15% following the depreciation of the American currency itself. Therefore, the falling demand for US Treasury securities is already causing an influx of money into emerging market currencies — not all, but into the most reliable and secured ones, ”explained Peter Pushkarev.

For example, since the beginning of 2019, the Chinese currency has already strengthened by 3.6% against the US - from 6.95 to 6.7 yuan per dollar, and according to Pushkarev’s forecast, over the next 12 months, it may rise to 6.5 yuan . Moreover, as investments in the dollar decline, market players will gradually buy currencies and securities from Russia, South Africa, India and Indonesia.

According to Alena Sabitova, an additional driver for the assets of developing countries could also be the resolution of the tariff conflict between the United States and China. As the expert noted, if the parties manage to negotiate a deal, this will lead to a recovery in the growth rate of the world economy.

At the same time, given the continuing uncertainty in the trade relations of the two states, many investors are still cautious. As a result, it is expected that the change in the dollar exchange rate on the world market will occur gradually. So, according to Pushkarev, by the end of the year, the DXY index may drop to the level of 90-95 points.