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CHINA: China Unlikely to Devalue to Support the Economy

CHINA
EM BulletAPACChinaEmerging Market NewsBulletGlobalFixed Income BulletsForeign Exchange BulletsRegionMarkets
  • With the anticipated release of FDI flows expecting to provide further negative news for China, it should not be enough to pressure authorities to devalue their currency like 2015.   
  • In August 2015 the PBOC surprised markets with a 2% devaluation of the currency that negatively impacted markets domestically and globally and challenged global investors thinking on investing in China.
  • With sustained FDI outflows this year putting pressure on CNY another devaluation could exacerbate these flows, piling further pressure on the currency.
  • The multi-year decline in the housing market in China has negatively impacted consumer and business confidence with GDP growth declining accordingly.
  • A devaluation would further impact confidence in the economy and in authorities thereby making it an unlikely option for authorities.
  • Lastly a devaluation would severely impact Beijing’s desire to internationalise CNY and challenge the USD’s authority.
  • Devaluation represents a ‘big bang’ policy approach, one that seems unlikely in this environment.  Rather policy adjustments are expected to be gradual and incremental with an emphasis placed on arresting the declining sentiment in the real estate sector. 
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  • With the anticipated release of FDI flows expecting to provide further negative news for China, it should not be enough to pressure authorities to devalue their currency like 2015.   
  • In August 2015 the PBOC surprised markets with a 2% devaluation of the currency that negatively impacted markets domestically and globally and challenged global investors thinking on investing in China.
  • With sustained FDI outflows this year putting pressure on CNY another devaluation could exacerbate these flows, piling further pressure on the currency.
  • The multi-year decline in the housing market in China has negatively impacted consumer and business confidence with GDP growth declining accordingly.
  • A devaluation would further impact confidence in the economy and in authorities thereby making it an unlikely option for authorities.
  • Lastly a devaluation would severely impact Beijing’s desire to internationalise CNY and challenge the USD’s authority.
  • Devaluation represents a ‘big bang’ policy approach, one that seems unlikely in this environment.  Rather policy adjustments are expected to be gradual and incremental with an emphasis placed on arresting the declining sentiment in the real estate sector.