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The Chinese landing issue rose in Q4 2011. Chinese manufacturing PMI is flirting between contraction and growth, around the 50 point mark.

We’ll start with China, but it’s not only the world’s No. 2 economy that is suffering.

This analysis originally appeared in the Forex Outlook for Q1 2012. You can download the full report for free by joining the mailing list in the form below.


China suffers from:

  • Lower global demand: As the world slows down, demand for Chinese goods drops.
  • No diversification to domestic consumption: In order to counter a drop in demand for its exports, China should have seen internal consumption. The opposite happens: the share of consumption out of GDP is falling in the economic giant.
  • Bursting housing bubble: Not all cities are ghost cities, but prices are falling in the strongest centers, such as Shanghai and Beijing. This doesn’t bode well.

After fighting overheating and inflation, China quickly changed course and went to loosening policy. This might help in having a softer landing, yet risks are quite high.

USD/CNY has fallen very gradually but in general, the yuan continues appreciating. This might change in Q1 2012, as China may wish to help its exports. The US may be angered, but given the slowdown in China, helping exports seem logical. QE2 indirectly helped US exports with a softer dollar.

As the yuan cannot be freely traded, the news from China continues having a strong impact on the Australian dollar and also indirectly on the kiwi.

  • The Australian dollar depends on building demand from China – demand that impacts Australia’s iron ore exports. If prices continue falling, this will have a strong impact on the Australian dollar.
  • The New Zealand dollar depends more on internal consumption of food. A weaker yuan means less Chinese demand for food from New Zealand and weaken the kiwi.


The second largest Asian economy saw its currency move mostly on safe haven flows. This may change in 2012.

The currency agreement between China and Japan may indirectly weigh on the yen, as it creates an opportunity for selling Japanese yens and buying Chinese yuans. The impact of this agreement will likely wait for later in the year.

Japan has a bigger worry: a debt mountain. Japan’s debt-to-GDP ratio is over 200%, worse than Greece. Japan has less corruption, and a much more developed economy, yet its biggest advantage is who holds the debt: it isn’t shaky European banks, but rather its own citizens.

This has kept Japan quite strong so far. But, the horrific earthquake, tsunami and nuclear disaster on March 11th 2011 added pain to the economy. Japan plans on raising more debt in 2012 and even if the price is cheap, the mountain is growing.

On the other side of the formula, GDP is hardly growing and is unlikely to do so given a stable population.

At one point or another, this debt mountain will be of importance. Japan isn’t likely to see rising yields in Q1 2012, but the growing talk about Japanese has to be watched and can hurt the yen.

Other Asian countries are experiencing downturns as well. India has seen its currency drop. South Korea went from a policy of weakening the Korean Won to a policy of strengthening it. Both currencies are likely to depreciate during Q1.

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