Chinese Former Central Banker: “Some Disturbing Factors” Have Emerged In The Chinese Market

Monday, August 13, 2018
By Paul Martin

by Tyler Durden
Mon, 08/13/2018

In a surprisingly candid assessment, a prominent Chinese economist and former central banker warned on Saturday that China should be prepared for a new round of capital outflows and currency depreciation when bracing for the impact of the trade war with the US and other disturbances to the financial markets.

Yu Yongding, a senior researcher with the Chinese Academy of Social Sciences and a former adviser to the People’s Bank of China, said “some disturbing factors” had emerged in the Chinese financial markets, such as the wave of peer-to-peer lending defaults which we discussed over the weekend, as well as renewed concerns about a property bubble and an economic slowdown in the second half of the year.

As the SCMP first reported, Yu told a financial forum in northeastern province of Heilongjiang that the trade war with the US will have a negative impact on China’s economy and market sentiment, as will the impact of interest rate increases in the US and the financial crisis in emerging markets.

Yu also warned of the risks of the plunging Turkish lira after US President Donald Trump doubled steel and aluminium tariffs on Turkey amid ongoing political tensions. The lira, which has continued to tumble on Monday, and is the worst performing currency of 2018, also took its toll on the European financial markets, weakening the euro and rouble.

“There have been discussions among investment bankers whether there would be a repeat of the Asian Financial Crisis. The so-called herd effect [like that] in the [1997] Asian financial crisis may affect China,” he said.

Putting these growing adverse factors together, Yu warned that the yuan exchange rate would continue to face “downward pressure which may reinforce the depreciation expectations”.

“I think maybe we should be prepared for a new round of capital outflow and yuan deprecation. This may not happen, but we should prevent the problems before they happen,” he said.

And speaking of devaluation, Saturday marked the 3rd anniversary of the PBOC’s decision to devalue the Yuan in 2015. The central bank engineered a depreciation of 2% in three consecutive days starting on August 11, 2015, but insufficient communications with the market triggered panic and launched continuous capital outflows amid fears of an economic slowdown.

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