Given stalling Chinese economic growth, the People’s Bank of China (PBC) lowering the renminbi peg against the US dollar by 1.9% to 6.2298 does not come as much of a surprise.
The move is widely seen as a way for China to both boost exports and also increase the likelihood of the yuan being included in the International Monetary Fund’s special drawing rights basket (SDR) by loosening the band, subsequently giving it greater exposure to global market influences.
However, while the move itself was not surprising, for Aidan Yao, Axa Investment Managers’ senior emerging markets economist, the timing of it was somewhat unexpected.
“We expected that the PBC would want to keep the renminbi broadly stable ahead of the IMF’s decision on the SDR,” he said.
“In addition, while [Chinese] capital outflow pressure has eased recently, our estimate suggests that outflows have nevertheless continued until June with smaller magnitudes. Against this backdrop, we thought the PBC would be cautious with its FX policy to avoid giving markets the perception of currency devaluation, which would trigger even larger capital outflows.”
It is on the devaluation point that the medium-term futures of the Chinese and Asian markets hinge, says Ben Gutteridge, head of fund research at Brewin Dolphin.
Gutteridge believes that despite the Chinese authorities labelling the renminbi shift as a “one-off”, there is scope for further moves, depending on how varying factors react.
“Any future moves will depend on how Chinese economic growth responds and the IMF reaction to China liberalising its policy,” he said. “We cannot say with any certainty that this move will be a one-off; if the Chinese economy continues to slow or the jobs market looks challenged then they would be driven to widen the band and devalue the currency further.
“We have seen the rest of the Asian currencies basket fall as a result, and it is sending a deflationary pulse into the global economy. [The PBC] will not devalue aggressively – they know that aggressive deflation would sap global demand. But, on balance, we are concerned and are left with a cautious disposition towards emerging market and Chinese assets.
He continued: “The concern is around how quickly the peg is loosened. A fast-paced loosening – which is not our base case – would be really quite concerning for the global economy. It would exacerbate the currency wars and put a lot of downward pressure on Asian profitability, pushing Asian and emerging market equities into a pretty poor state of affairs.
“They will not do it aggressively – they know that aggressive deflation would sap global demand. But on balance, we are concerned and are left with a cautious disposition towards emerging market and Chinese assets.”
