Forex Traders with Exposure to Asian Currencies Should Tread with Caution

Those investors who have exposure to Asian currencies and, in particular, Chinese currency, should take into consideration the fact that this country is now facing the impact of the global slowdown quite drastically. Late in 2008, the country’s government followed the example of major economies around the world to initiate a massive stimulus package. Many experts feel that this and other succeeding efforts have only worsened the situation here.

Massive Stimulus Pumped into Economy

The stimulus package undertaken by the Chinese government works out to about 15% of the country’s GDP. This is actually one of the largest stimulus programmes undertaken by any country. Banks were given the directive to extend existing credit to head off defaults before they could happen. Infrastructure projects were given special preference when it came to funding to boost economic activity/ employment levels. The total loans outstanding in this large Asian economy have increased by half over the last couple of years.

In February this year, the banks have been given fresh instructions to roll over about $1.7 trillion in loans made to local governments. The underlying message is quite clear- there is a good chance of defaults occurring if the loans are called back as per original schedule. This shows that the economy is decidedly wobbly here. 

Financial Resources are being Absorbed

In the view of analysts such as Michael Pettis Finance professor at Guanghua School of Management (Peking University), these potential bad debts are absorbing financial resources. The domestic consumption is being restricted as a result and this is keeping the economy subdued.

Decreasing  External Demand for Chinese Goods

At the same time, the external demand for Chinese products is also on a decline. This has lead to a fall in the trade surplus for this economy.  An economy that is heavily dependent on exports, China is bound to feel the pinch in no uncertain manner from this development. The government is not completely unaware of the possibilities. In fact, the recent GDP roll back indicated that the government knows only too well that the coming years may bring some trying times for the Chinese economy.