Markets : Off Renewed Yuan Weakness Essay

1910 Words 8 Pages
Markets Shrug Off Renewed Yuan Weakness
Fear about a potentially large Chinese currency devaluation was cited as a reason for January’s sharp sell-off in risky assets. At the G20 meeting of Finance Ministers in Shanghai in February, there were rumours that the People’s Bank of China (PBoC) threatened a 15-20% devaluation of the yuan unless the Fed postponed its planned interest rate rises. A deal was consequently struck between the Fed and PBoC to slow the rate of US monetary policy normalisation. Signs that the Chinese economy subsequently stabilised in Q1, albeit courtesy of another surge in credit, helped to sooth investors’ angst that the yuan would weaken any further. Accordingly, US equities have recently been flirting with new all-time highs, also partly assisted by a recovery in oil prices. Meanwhile, investors have shrugged off an interesting recent development in foreign exchange markets. The yuan has started weakening again and there was a much larger-than-expected drop in China’s foreign exchange reserves in May. The combination of a weakening currency accompanied by declining foreign exchange reserves resulted in tightened monetary conditions in China in late-2015 and early-2016 which had adverse ramifications for equities. The Chinese currency has weakened by -1.3% versus the dollar since the beginning of May. Markets seem to have shrugged off this genteel pace of devaluation. This is in stark contrast to the events of last August and January when the PBoC…

Related Documents