China devaluation not the last of Government’s meddling

The move by the People’s Bank of China to devalue the yuan is not the end of intervention by the Government, say experts. 

In what was seen by many as a shock decision, the PBoC changed the way it fixes the yuan by ending its four-month peg to the dollar, which led to the biggest devaluation of the yuan in 20 years yesterday – of 1.9 per cent. Today has seen another such move by the country. 

The bank claims that it is a one-off move, but experts think otherwise. 

While the Government’s motives are not entirely clear, some predict it is intended to boost China’s exports, some say it is aimed at fuelling domestic spending, and others see it as a pure currency valuation change.

Whatever the reason, more change is coming, says Schroders’ Emerging Markets Economist, Craig Botham. “This is not the end of intervention. PBoC intervention will be needed to alter market expectations if the authorities want to prevent depreciation.” 

“As we see it, risks remain that the China government will need to engage in further measures on the currency,” agrees JP Morgan Multi-Asset macro fund manager Talib Sheikh. 

Experts expect a gradual depreciation in the currency.

“Further gradual renminbi depreciation is now likely, and other regional currencies now face downwards pressure,” says Bhaskar Laxminarayan, chief investment officer of Pictet Wealth Management Asia. “There will be little benefit for China’s economic growth.” 

However, he says the Government will be careful not to allow a sharp depreciation. 

Others disagree. Aidan Yao, senior emerging market economist at AXA Investment Managers, says the move today does not mark a new trend of currency depreciation, instead believing that many factors rely on a strong and stable reminbi. 

“This is why the PBoC is calling [the] move a one-off adjustment to prevent depreciation expectations from becoming entrenched,” he adds. 

Whatever the level of depreciation, the fallout from China is likely to hit a swathe of emerging market investments, says Sheikh. 

“China’s decision to weaken the currency, their most significant devaluation in the last 20 years, meaningfully increases our existing conviction within our multi-asset portfolios to remain negative on the emerging markets complex,” he says. 

“It also reinforces our view that disinflationary forces across the region are taking hold. We remain significantly underweight emerging market equities and short various emerging market commodity related currencies that will suffer from China’s deterioration.” 

Indeed the initial devaluation move yesterday led to a 1 per cent drop in other Asian currencies, such as the Singapore Dollar, the Australian Dollar and the South Korean Won, as markets predicted monetary policy in those regions would have to keep up with China. 

Ultimately, says Carolyn Chan, co-manager of the Liontrust Asia Income fund, the move to unpeg the yuan from the US dollar is good for Chinese companies, rather than a reason to sell out of the sector. 

“It is not beneficial for the competitiveness of Chinese companies for their currency to be tied to one of the world’s strongest currency, as has happened with the sustained US Dollar strength since mid 2014,” she says.