"In the global financial environment of high monetary circulation and weak economic growth, valuations of assets will continue to experience increased volatility, while the goal of investors will remain the discovery opportunities in markets with good metrics fundamental and technical analysis."
The Central Bank of China moved last week the decision to devalue the country's currency, the yuan, leading to a three-year low against the dollar. The cause of the devaluation was the slowdown in growth of the Chinese economy to 7 percent in the first two quarters of 2015, and the Chinese government officially lowered its growth target to 7 percent for the year.
Although this rate is still quite remarkable by international standards, it is significantly lower than the 10 percent average recorded in the previous three decades. The major central banks of the world (Federal Reserve, ECB, Bank of Japan) had already publicly expressed their concern about the impact of the decline in Chinese growth in the economies of their countries some time ago announced the devaluation of the Yuan. In recent weeks the second largest economy in the world announced disappointing figures for the volume of exports, industrial production and retail sales. The fall of the index of the Shanghai stock market the past two months around 30 percent being in bear market phase.
China has said it will allow market forces to play a bigger role in the value of the currency, which could help the country make the case for becoming a global reserve currency. But the move is also aimed at bolstering the economy, by improving Chinese exports.
China Devalues Its Currency as Worries Rise About Economic Slowdown
However, a depreciating renminbi also has implications for China's pledges to open its economy and financial markets wider, including efforts in recent years to lift the currency's global prominence. The central bank has been lobbying the International Monetary Fund to include the renminbi among freely-traded benchmarks like the dollar, euro and yen, so that other countries can include it as an official reserve currency.
While acknowledging these efforts, the fund issued a report last week saying that "significant work remains outstanding" before it could decide whether to include the renminbi as a global benchmark, adding that no changes were likely to be made before September of next year. The fund also singled out China's official daily fixing of the renminbi's exchange rate, saying this "is not based on actual market trades."
Tuesday's devaluation "is likely intended to improve the 'market-driven' quality" of the exchange rate to appeal to the I.M.F., Wang Tao, the chief China economist at UBS, wrote in a research note. It is unlikely that the Chinese government will let only market momentum drive the renminbi exchange rate from now on," Ms. Wang added, "as that can be quite destabilizing."
On a quite informative corporate video she added: China's 'new normal' is slower, higher quality growth,
The effect on prices of most goods as a result of China's decision to devalue the Yuan is negative due to :
•The deceleration of the second largest economy of the world reduces demand for commodities.
•Imports of goods priced in dollars, such as oil, metals, etc., will become more expensive for Chinese importers, further reducing demand from the Asian country.
•The reduction of the disposal of speculative capital to take risks under current conditions (concerns about global growth, uninterrupted downward trend in goods likely increase Fed rate etc.) which aggravates increased nervousness due to China.
Moreover, the decline in China's growth and the devaluation of the Yuan will affect the global economy and international trade affecting exports of the European, Japanese and American multinationals in the sectors of automotive, luxury goods, raw materials, technology.
Chinese companies are active in export and China in these industries gain a competitive advantage from the devaluation of the Yuan. In contrast, the rise of the US dollar against the yuan will reduce the net profits of Chinese companies that have debt in USD and those that import raw materials to produce. In the emerging markets of Asia and the Chinese stock market, investors should take into consideration for equity valuations new disturbing trends in the macroeconomic data of the area, increased volatility market, but also the possibility of renewed devaluations yuan, which will reduce any returns from appreciation and dividends when converted into foreign currency.
The negative effects on exports allow the ECB and Bank of Japan using dovish rhetoric or the expansion of quantitative easing programs already implemented, especially since long-term inflation expectations remain low. The liquidity increase policies will lead to the continuation of long-term downward trend in Euro and Yen, as a "response" to the devaluation of the Yuan, in order to stimulate economic activity in the Eurozone and Japan respectively. The reduction in the prices of imported products from China steps down the already low inflation in developed economies. As a result the deflationary trends will intensify, the fragile economic growth in the Eurozone and Japan, the fall in oil prices and other raw materials, the decline in the value of other Asian currencies
The downward trend in Asian currencies may continue in the coming months, possibly signaling the beginning of a "currency war" focusing on Asia
If losses in Asian currencies reach undesirable levels, a development which could be accelerated and due degrading speculation central banks in the region may be forced to undertake interventions to support their currencies, increasing interest rates, etc., which will ultimately affect economic growth rates. The devaluation of the yuan is expected to support the prices of government bonds with high credit rating, such as German and American, as a result of an increase in volatility in global currency markets, equities and commodities, which increases the demand for "safe investment havens." and awaited continuation of the quantitative easing programs and bond markets by Central Banks. Pressures already accept currencies of countries like Australia and New Zealand, which have significant trade relations with China, this evaluation that will reduce interest rates to offset the decline in exports.
The rise of the Euro against the major currencies during the weekend that the devaluation of the Yuan announced believe that happened because of the ECB's low interest rate, which now makes the Euro currency funding carry trades. This development has alarmed believe that the ECB is aware that appreciation of the euro amid weak growth in the eurozone is doubly damaging to European exports when it happens to nervousness environment in global markets. As the US Federal Reserve, the appreciation of the dollar against the Yuan seems to offer the Bank a good "excuse" to delay raising its key interest rate, which the majority of analysts and capital markets place in September.
The devaluation of the Yuan practice shows China's decision to maintain the export sector in the role of a pillar of economic growth. So, for now shackled to the intention of its Government to transform its growth model from export mainly to inflow of foreign investment into model based on domestic consumption. As result the foreign multinationals will probably move to reduce investment in China as a result of the:
•impairment of the value of their assets when converted to the base currency (Euro, Dollar, etc.) in the consolidated balance sheet level
•increased production costs (imported raw materials) due to the devaluation of the Yuan
•reduction of liquidity and business confidence in the country after the recent stock market "crash"
•reduction in consumption due to economic slowdown reduction of demand for goods produced by those in China because of weak global economic growth
•labor costs will be pushed and reduced disposable personal income in China due to increase in prices of imported, reduction of jobs in infrastructure slowdown in GDP growth, reduction in the provision of consumer credit
The above shall feed the lower expansion rates trends "Asian giant" causing negative effects on the global economy. The devaluation of the Yuan has increased price volatility in international stock exchanges. The downward adjustment in projected sales and profitability of exporting firms in developed economies will reduce equity valuations. In contrast, the expansion of central bank balance sheets to maintain their low interest rates and increase liquidity through asset purchase will boost in selected stocks, particularly those that receive little competition from Asian companies.