Is there complacency over Chinese woes?
Comment of the Day

July 20 2018

Commentary by Eoin Treacy

Is there complacency over Chinese woes?

Thanks to Niru Devani for this article on China.

The Chinese markets turned around today from being down around half a percent to rise by over 2% by the close with the renminbi stabilizing. There was some speculation that the authorities had been supporting the currency to slow down the pace of decline. There was also talk that they would add liquidity into the system to support the equity market.

The yuan has fallen by over 8% since late March and is at a one-year low against the dollar. The renminbi’s fall is partly a catch-up with the other currencies that have fallen against the US dollar. The dollar has been strong this year because of widening interest rate differentials with the Federal Reserve being the only major central bank raising rates. However, the currency has also fallen because of softer economic growth and trade tensions with the US. The Chinese authorities are likely to tolerate a weaker currency as long as it falls in an orderly manner and smoothing its decline from time to time as they appear to have done today.

The current phase of renminbi weakness has not yet led to a global market panic similar to the one we saw in late 2015 and early 2016. However, it is one of the key concerns on investors’ minds. So far, the pressures have been felt in the commodities markets where copper, often described as the metal with a PhD in economics because of its past record of being a lead indicator of economic growth, has fallen sharply since early June, declining by about eighteen percent over such a short time. The tariff war has clearly been a big contributor as has the strength in the dollar which has negatively affected various other commodities with the exception of oil which is being moved by other factors.  Asian equities and other emerging markets have also been hit hard over the last few months. The Chinese equity market is in correction territory having fallen by 20% from its highs in January while the Hang Seng index is at a ten month low.

The tariff war is unlikely to come to a resolution before the mid-term Congressional elections. The concern is that the weakness in the Asian and emerging markets spreads to the developed markets. Other than the Nasdaq index, most other major markets have not made new highs since January. The best case scenario is that the consolidation in these markets continues for longer, the worst being that they react more sharply to the falls in Chinese and emerging markets. China is at least as important a factor as the US and merits watching closely.

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