Chinese Yuan is falling against the US dollar. From 11th to 24th August, Chinese Yuan depreciated from 6.20 to 6.40 to a dollar. This is the official rate in China. The offshore rate reached 6.51. This is a very fast drop for a currency that is used by 1.4 billion people. The official reason is to echo international market demand to make the Chinese Yuan currency rate more market driven and follow offshore market supply and demand. For years, the US government has been urging the Chinese Yuan to appreciate as China exports more to US than imports from them or in technical terms, China is running a trade surplus against the United States. On the other hand, while “Made in China” is still often found in many consumer products such as iPhone, there are more and more consumer goods such as clothing and sport shoes are now made in places like Vietnam and Indonesia. For those who travel to Beijing and Shanghai, a business dinner may not exactly cost the same as a meal in Gordon Ramsey's restaurant but no longer at emerging market prices. China labor cost has definitely gone up in multiples in the past 10 years. Compared to Japanese Yen over 30% depreciation since Prime Minister Abe took office in December 2012, Chinese Yuan depreciation is not steep enough to revive its low end manufacturing. A more significant gesture of the Chinese Yuan depreciation is that it no longer artificially tags along the US Dollar. It is accepting market force to push it around a bit. This could be a step towards making the Chinese Yuan an international currency. Having seen how Russian Ruble collapsed last year, Chinese Central Bankers are very careful. Luckily, the Chinese Yuan is not yet fully convertible so not easy for hedge funds to short.
Why should one in Europe or US care about a few percentage drop in a restricted currency like Chinese Yuan? Well, Chinese Yuan is pretty much the last Asian currency standing as everything from Korean won to Indonesia Rupiah have fallen 17.5% and 20.0% in the past 12 months as of 24th August. This may mean the US Dollar has been the winner but eventually, if all your neighbors are offering their products at 20% lower than yours, you will have to adjust as well. If US Dollar stays where it is, it could mean US Dollar asset has to drop in prices. This means stocks and properties. US stock market has fallen 7.2% in a month if we use S&P500 as the benchmark. Nasdaq Composite index also dropped 9.1% in the same period to show that even high tech stocks are not immune to asset price correction. Apple share price dropped 14.8% in the same period on the back of concern over its sales in China would slow down. Many US listed companies are international companies that make profit from all over the world. If “all over the world” is struggling, many US listed companies will struggle.
Commodities such as Iron Ore, Copper and coal have been falling since 2011. China is the biggest importers and users of many commodities. Commodities driven economy like Australia is in winter. Oil at USD 40 means Russian and the Middle East are pumping a lot less money from the ground. 2008 financial crisis was driven by over leveraging of bank balance sheets. This time, we could be entering into a fundamental valuation correction and we may see deflation in developed countries and inflation in emerging markets.
Investors could take 1997 Asian crisis as a reference. This time things should be better as Asian countries or companies learnt their lessons and did not issue USD debt up to their eyeballs. You do not want to owe people USD when your income in local currency is depreciating fast. The right strategy last time was to hold onto developed market currencies and perhaps pick up asset after the correction. The difficult part is how to tell when it is “after the correction”.
Another topic. Euro zone looks forward to the next Greek Prime Minister. This seems to be a new series of the Greek Debt drama. Who would be the new Prime Minister? Would the new PM tear up the agreement made by the last PM and refuse to implement the painful austerity measures? The nation has voted to go one way but then a change in leadership could re-open the conversation. It is hard to see the end of the tunnel but perhaps the whole issue has become part of normal life. Euro zone will live with the risk that one day there maybe a Grexit. After rehearsing it a few times since 2008, Grexit may not cause a Tsunami to the world but still a tropical storm. Euro as a currency may have reached a good level against USD or GBP. Euro stock markets have fallen 14% in a month as of 24th August and may need to correct more with the US market.
