Citigroup Cautions Investors Against Dumping Stocks Over China

The Global Consequences of China's Manufacturing Slowdown
  • Latest stock market tumble more a correction than bear market
  • Real issue: How much yuan policy has been priced into markets?

As investors grapple with whether to stay in or pull out of stocks, Citigroup Inc.’s advice is not to jump to hasty conclusions when it comes to China -- the source of most of the angst.

“Clearly China has been at the centre of much of the concern, but what really matters for global markets is the extent of contagion from China’s slowdown,” Mark Schofield, managing director of the global strategy and macro group at Citigroup Global Markets, and his team wrote in a research note on Monday. “This ageing bull market has clearly stalled, and faces considerable headwinds,” but “it is too early to call its demise.”

Citigroup points to China’s missteps with the yuan as the real source of aggravation. While the potential for the world’s most populous nation to drag the world economy into recession should not be undervalued, the market response in the form of a global rout should be interpreted more as a “correction,” the report said.

“We do not think that the data in China has materially worsened of late,” Schofield wrote. “What is really unsettling markets is uncertainty over the policy response,” specifically over its currency, “but how much of this is now priced into markets is unclear.”

The yuan has fallen about 5.6 percent in Shanghai since its August devaluation, even as China’s central bank burnt through $321 billion of its foreign-exchange reserves to ease the currency’s slide. While officials said they intend to keep the exchange rate stable, Citigroup expects to see further yuan depreciation.

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