Schroders’ Wade turns eye to yuan devaluation

keithwade

Schroders chief economist Keith Wade believes a devaluation of the Chinese yuan would pose a bigger economic threat than the falling oil price.

Entering the Chinese New Year, he says concerns over the oil price and fears over US growth are overdone, in spite of appearing to drag down global equity markets for the past year.

At just more than $33 a barrel at the time of writing, Wade says a lower oil price should lead to stronger growth, albeit with an 18-month lag.

In addition to a buoyed consumer sector, he says fiscal policy will add 0.5 per cent to US GDP this year.

“Much of the recent weakness in the US has been due to the inventory cycle and, as long as final sales hold up as we expect through the consumer, growth should firm in the current quarter,” he says.

Calling a depreciating yuan “the biggest unknown”, he expects the Chinese authorities to reintroduce measures to stabilise the currency.

“We do not see a strong case for the authorities to devalue the currency and are encouraged that the [yuan] has been stable since 7 January.”

He added: “Against this backdrop, we see our exchange rate wars scenario – where China devalues by 20 per cent, triggering a reaction from others – as increasingly likely.

“The Bank of Japan’s introduction of negative interest rates in January can be seen as a response to the sharp appreciation of the trade-weighted yen since the beginning of the year.”