China has devaluated its currency, Renminbi. Theses moves shows China is using both domestic (fiscal, monetary) and external (currency) levers to support growth. CNY depreciation will have a negative impact on commodities (given China is the largest consumer) and commodity exporting countries -Indonesia, Malaysia-. If this leads to further easing from other countries, it will be positive for equities, says Mirae Asset.
Impact in China
PBOC’s weakening of CNY may lead to further depreciation, which might not be all negative. “Historically, we have seen currency adjustment as a beneficial tool to boost exports and therefore economic growth”.
However, the risks of currency wars remain. China is in a strong position to defend its currency thanks to it’s large FX reserves and low offshore borrowing. Rather than looking at USD/CNY, China might prevent further appreciation of REER. Emerging Asia constitutes about 20% of China’s total trade, with Europe and Japan accounting for around 40%, according to the experts.
Even if China does want to reverse the appreciation of CNY vs other Asian currencies, it would imply a ~10% depreciation in CNY. On various models, RMB is around 10% overvalued on an average of various frameworks.
“Overall, for the financial sector, we are entering into a lower growth environment, with the asset quality cycle turning and a not-so-conducive operating backdrop. As a result, we maintain an Underweight the financial sector. In such an environment we prefer countries where monetary easing will have the ability to deliver a boost to domestic demand and those with low credit penetration (India, Indonesia, Philippines). Apart from these countries, we continue to like Chinese life insurance companies where protection gap is significant and the industry is showing signs of turnaround for the past 18 months”, says Mirae Asset.
Negative for exporters and ASEAN countries
However on a broader macro perspective, it is negative for exporters to China (or countries with close linkages with China) like Korea, Taiwan, Hong Kong and Singapore. ASEAN may be impacted due to second order effects with their currencies depreciation and reducing the scope of interest rate cuts as currencies remains under pressure.
Regarding the US rate hike, “on the flip side, it might possibly lead to a postponement of US rate hikes, as strong USD and disinflation- ary impulse due to actions of various central banks (CN, EU, JP) might impact the conditions within the US. Furthermore, the notion of substantial real weakness in China (which the FX move indirectly signals) is, in itself, not inmaterial”.
Mirae Asset also analyses the impact of the devaluation in Renminbi, sector by sector:
For Alicia Miguel Serrano