MARKET MOVER REPORT – China in Focus
Global equity markets have had a volatile start to 2016. China has featured prominently in the press as of
late and has been at the centre point of the global selloff. believe the China story is one of transition (manufacturing to consumer led economy) rather than a complete market collapse. are
running a multi-part series on the changes facing China in 2016 and their impact on China and the rest of
the world.
Part III: Yuan Devaluation
What has Happened?
The Chinese Central Bank (PBOC) has continued their policy of a weaker Yuan this week, devaluing their currency by a further 0.5% against the USD. A weaker currency is in response to a slowing domestic economy and suggests China is trying to engineer a weaker currency to cushion the impact of slowing growth in its economy.
What is the Impact?
A weaker Yuan makes Chinese exports cheaper overseas, and foreign products more expensive in China. This makes China relatively more competitive in the global market place. Over time it is expected to reinvigorate their ailing manufacturing industry.
These actions highlight concerns over the strength of what is perceived to be a fragile global economy. Despite global central bank efforts to simulate growth, emerging market demand continues to slow and is leading to reduced trade and economic activity with the developed world. Together with falling commodities, it is resulting in global deflationary pressure. Deflation is feared by most as it can lead to the economy spiralling out of control and into an economic recession. Central banks typically find battling deflation extremely difficult and therefore try to avoid it all cost.
What is Expected?
Further depreciations of the currency are likely over time. Currently 1 USD = 6.5660
CNY. We see the Yuan moving closer to 7.00 as the POBC continues its devaluation
policy in an attempt to spur growth.
This is likely to cause greater volatility both within currency markets and other asset
classes. We may also see other central banks taking similar actions in order to
counteract the impact on their own currency.
A Chinese currency devaluation (government or market-led) could cause a domino
effect across the world. Other countries could be forced to lower the value of their
own currencies to remain competitive with China. The wider global economy fears
the start of a currency war where nations manipulate their currency in order to
remain competitive. The European Central bank (ECB) and the Bank of Japan (BoJ) are
also attempting to artificially lower their exchange rates in order to spur economic
growth.
What now?
The positives
- Equity market moves in context aren’t that bad – They have only retraced
back to levels seen last year - Mainly only Chinese retail investors effected – global wealth not tied to China
stock market - We were already aware that China was slowing- No surprise/shock
China is taking measures to address their slow down - They have ample resources at their disposal to counter weakening growth
- The government remains committed to support the economy at any cost
- There is a transition away from manufacturing to a consumer driven
economy – this process will lead to further economic growth - The US economy, the world’s largest economy, continues to grow at a
moderate pace
The negatives
- The volatility is effecting consumer and investor confidence
- The Chinese equity market is having spill over/contagious effects on other
global equity markets - The devaluation of the Yuan may offset what the ECB and BoJ are trying to
achieve - The negative sentiment is driving commodity prices lower – may effect
inflation