Research Team at BBH, lists down the reasons behind the seeming disconnect about why aren't the developments in China having a greater impact on global markets.
Key Quotes
“First, we suspect that the surprise and uncertainty over intentions led to an exaggerated market response in the summer of 2015 and earlier this year. The Chinese stock market, for example, is dominated by retail funds and has little relationship to the Chinese economy. China stocks have also stabilized. In July and August 2015, the Shanghai Composite fell 14.3% and 12.5% respectively. It fell 22.6% in January 2016. Since March, it has moved no more than 3.6% net-net in any month. Similarly, in August 2015, the dollar rose 2.7% against the yuan. Its monthly moves have been much smaller. October could see the biggest monthly move since August 2015, and the yuan may fall about 1.8%.
Second, the yuan's decline has also been modest when compared with other currencies this year. Among emerging market currencies, Mexican peso and Turkish lira have fallen further, not to mention the Argentine peso. Among the majors, sterling is off 17%, and the Swedish krona has fallen 5.6%.
The yuan's devaluation is also modest in terms of impact on Chinese exports. Due to the structure of Chinese industry, yuan incurred input costs in the country's exports suggest the depreciation is insufficient to have much impact on Chinese competitiveness. Exports (and imports) are lower on a year-over-year basis. This offers prima facia evidence against claims that currency depreciation is reigniting exports for a slowing economy.
Third, the US Treasury seems somewhat more relaxed about the yuan. Rather than escalate the tension between the world's two largest economies, the depreciation of the yuan has not spurred a backlash from the US. Even under the new criteria offered by the Treasury Department, China still does not meet the criteria of a currency manipulator.
Fourth, the Federal Reserve has signaled its intention to hike rates before the end of the year. Even Evans, the dovish Fed President from Chicago recently suggested three hikes before the end of next year may be appropriate. The Federal Reserve's broad trade-weighted measures of the dollar have risen in four of the last five months (through September). The yuan's weakness is partly a function of a stronger dollar. The yuan has depreciated slightly against the basket that PBOC has adopted (though many people and businesses, of course, continue to take decisions based on the dollar-yuan rate).
Fifth, the PBOC has been intervening to slow the yuan's descent. If it were intervening to push the yuan, as it has sometimes in the past, it would be accumulating reserve assets, not liquidating them. Market forces, which Chinese officials have pledged to embrace, appear to be pushing the yuan down faster. Chinese intervention is to smooth out and make more orderly the yuan's decline.
The performance of Chinese markets and the yuan can once again erupt onto the global stage and disrupt the capital markets. However, the role of the yuan and Chinese stocks in the world economy is modest, and the current pattern may be more sustainable than its markets dictating the investment climate.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.