Word on the web: Broken China

As the Chinese yuan’s triple devaluation stuns markets, is a worldwide currency war on the cards?

As recently as 2008, China was experiencing an investment boom on the back of an unprecedented stimulus package. The country’s economy grew to be the second largest in the world, behind the US. In this context, the recent Chinese economic financial crisis becomes all the more akin to an earthquake.

And what occurs in China has a ripple effect elsewhere – last week’s devaluation of the yuan, the third in as many days, has sparked debate about whether we can expect similar episodes worldwide.

A vicious circle

In a City AM debate, Gabriel Stein, Director of Asset Management Services at Oxford Economics, says the world should indeed be prepared. He notes that this isn’t “because China wants to start [a currency war], but because the decision is not China’s. . . By announcing, on three consecutive days, a devaluation of the currency – each time coupled with assurances that it was a one-off – the authorities have sharply undermined their credibility.”

Stein’s closing thought is particularly pertinent. He says: “So far, there have been few counter-moves. But unless China stops now, that won’t last” – a warning to the world that Chinese deflation may well trigger pre-emptive moves by other countries and lead to what Stein describes as a "vicious circle".

A side effectTaking an alternative view is Chang Liu, China Economist at Capital Economics. Liu argues that the devaluation was not a competitive move by the People’s Bank of China (PBOC). Instead he argues it was part of a planned liberalisation of the foreign exchange market. The PBOC has been taking liberalisation measures for years now, and Liu argues that devaluation was not a “concerted effort . . . to boost exports” but an inevitable result of the planned measures.

He says the PBOC aimed to “give markets more say in setting the renminbi (RMB) reference rate ahead of the IMF’s decision on whether to include the RMB in the special drawing rights basket” – a situation that had been unfolding prior to the events of the past couple of months.

Liu therefore anticipates that while the yuan will likely continue to fall in the next few days, the bulk of the decline has already occurred.

City AM debate

Revising expectations In a column for Institutional Investor, Archie Hart, Portfolio Manager, Emerging-Markets Equity Strategy at Investec Asset Management, takes a different view. He believes, like Stein for City A.M., that the yuan’s collapse will have huge consequences for other nations’ stock markets.

He states that the series of devaluations will “make the market and its participants revise their expectations of the current trajectory”. Hart notes that the “yuan has been appreciating against the American dollar for nearly 20 years”, a policy that he considers has firmly “outlived its usefulness”.

Hart maintains that even “small changes in the starting point and rate of change can have a magnified effect on valuation” – and it seems the changes in the Chinese situation are anything but small.

Institutional Investor column

Brick wall of China John Ficenec of The Telegraph arguably has the bleakest opinion of the situation. “Time is now rapidly running out,” he says. He adds that central banks across the world have “lost control and at the same time the global economy is grinding to a halt”.

Ficenec describes the Chinese economy as having fallen from grace since its high point in 2008, and having “hit a brick wall”. He points to the effect the slowdown is having on the global commodities market, given China’s large demand for iron ore, the benchmark price of which has fallen to $56 per tonne, less than half its $140 per tonne level in January 2014.

The Telegraph opinion

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk
Published: 21 Aug 2015
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