China's massive spending may dilute its currency
Oct 29 (Reuters) -China is considering issuing over 10 trillion yuan ($1.4 trillion) in extra debt in the next few years to revive its fragile economy, a move that may dilute its currency.
While such enormous spending will lend the ailing economy some support, an injection of cash on this magnitude should logically weigh on the yuan which is already close to a record low versus the U.S. dollar.
As for the economy, which grew stratospherically to become the second largest globally, some slowing was inevitable and a return of an extremely high rate of expansion isn't likely.
Stimulus may limit the pace of the slowdown but probably won't stop it. The only boom that may result is that for the stock market which is likely to rise further, as many other stock markets have done on the back of stimulus measures since the global financial crisis in 2008.
In this respect the yuan, undermined by very accommodative policies and lower interest rates, is likely to decline if sold to buy the higher yielding assets and currencies which will be underpinned by the boost to risk appetite from China's massive spending plan.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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