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Chinese Yuan Weakens As State Stimulus, Bearish Forecasts Revealed

March 6, 2019 at 17:38 by Andrew Moran

Chinese yuan denominationsThe Chinese yuan is weakening against several major currency rivals midweek. As the federal government unveiled its multi-layered stimulus to boost the economy, new forecasts show that economists believe growth could plunge to 2% in the next decade, but not before growing 6% this year.

China unveiled a major tax cut package on Tuesday, opening the annual session of the nation’s parliament. Warning that the country faces “a tough struggle,” Prime Minister Li Keqiang outlined a $300 billion proposal to slash taxes and reduce company fees. According to the No. 2 leader, some of these measures include lowering the value-added tax (VAT) for transportation and construction sectors from 10% to 9% and decreasing the VAT for manufacturers from 16% to 13%.

In addition, the federal government intends to increase spending and boost foreign firms’ access to its economy. This will include a 7.5% increase to its military budget of 1.2 trillion yuan, though this is down from last year’s 8.1% jump.

But will this be enough? It depends on whom you ask.

Research firm Capital Economics told CNBC that it expects gross domestic product (GDP) growth to crater to 2% in the next decade, citing a declining workforce, changing demographics, soaring debt levels, and falling productivity. But AXA Investments told Bloomberg that it thinks the Chinese economy will mirror 2018 and grow 2019 this year.

Meanwhile, Morgan Stanley wrote in a research note that the Chinese yuan will likely receive greater recognition as a global reserve currency. The Wall Street titan forecasts that the currency’s share of global reserves will advance to 5% within the next 10 years. With financial reforms on the table, enhancing investor confidence, central banks and sovereign wealth funds will acquire more yuan-denominated assets.

The USD/CNY currency pair edged up 0.06% to 6.7115, from an opening of 6.7074, at 16:18 GMT on Wednesday. The EUR/CNY advanced 0.11% to 7.5931, from an opening of 7.5844.

If you have any questions, comments, or opinions regarding the Chinese Yuan, feel free to post them using the commentary form below.

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