China's Currency But Emerging-Market Peers' Problem: New Yuan

  • `All now depends on what happens at 9:15 a.m.' daily in China
  • Others lack bandwidth China has to respond to growth concerns

In an echo of the Nixon administration’s missive when a depreciating U.S. currency was roiling its trading partners, the yuan may be China’s currency but it’s increasingly the problem of others -- and especially its emerging-market peers.

Smaller developing economies are struggling to cope with China’s decision to weaken the yuan, with Mexico warning of the risk of competitive devaluations and Thailand saying its exports will be affected. In Indonesia, where the central bank had seen room last month to cut borrowing costs, its governor says it’s prioritizing stability when setting rates and monitoring global developments.

“Emerging markets can’t decouple from what is happening in China,” said Jonathan Cavenagh, head of Asia emerging-market currency strategy at JPMorgan Chase in Singapore. “The parts of China that matter for most other emerging economies are still quite weak, and in a backdrop of a weakening currency, it will weigh on sentiment elsewhere.”

Anchors Aweigh: China Moves Off Dollar Peg

Strength in China’s new economic drivers is providing the country the bandwidth to continue its rebalancing agenda even as old growth engines such as manufacturing sputter, and rate cuts and fiscal stimulus deliver limited impact. For other emerging markets, the scope to cope with volatility and turmoil generated by Chinese policies is more limited.

New Reality

Emerging nations are confronting a new reality where the yuan is poised for continued depreciation and China’s demand for imports is curtailed. China took in 7.9 percent less in goods from abroad in December from a year before in yuan terms, a government report is forecast to show Jan. 13. That would mark a second straight year of declines.

“It used to be that you closed your eyes and you know the yuan is either stable or appreciating, and that’s a completely different landscape to where we are now,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore. “It used to be the mentality for emerging markets that China is a customer. Now China is increasingly a competitor. And it’s exporting volatility.”

Moves in the yuan have upset markets around the world and sent the Standard & Poor’s 500 Index down 2.4 percent on Thursday, capping the worst start to a year in data going back to 1928.

Bearing Burden

As the yuan weakens, the burden falls on on other currencies to take the pressure of a strengthening dollar. For some, it threatens to be more than what they can afford.

While the decline in the currency has been relatively small so far, it’s been enough to concern global investors and affect Mexico’s stock market and peso, Finance Minister Luis Videgaray said Thursday as the country spent $400 million under a program to support its exchange rate.

Mexico, with the most-traded emerging-market currency, held $177 billion of foreign exchange reserves last month, compared with China’s official tally of $3.3 trillion.

In an environment of rising U.S. borrowing costs, the window for emerging-market central banks to shore up growth with interest-rate cuts had narrowed even before the ructions in China. Lower rates now would hit their currencies even harder, and depreciating exchange rates could cause inflation to accelerate in struggling Latin American economies.

It’s Complicated

In Southeast Asia, “rising real yields indicate there is room for monetary easing,” said Toru Nishihama, an emerging-markets economist at Dai-ichi Life Research Institute in Tokyo. But under the current risk-off sentiment and volatility triggered by developments in China, “central banks need to think about” the impact that such action has over currencies, which complicates the situation, he said.

Agus Martowardojo, the central bank governor in Indonesia, with the world’s fourth-largest population, on Friday said that policy makers saw room for policy easing at the December meeting, but refrained from specifying whether that room remains. The bank next meets on rates in the coming week. He also said inflation is still “relatively high.”

By contrast, in China, sustained sub-2 percent inflation means the central bank has scope for further rate cuts, with the benchmark one-year lending rate at 4.35 percent. The country’s leaders last month signaled they will take further steps to support growth, including widening the fiscal deficit and stimulating the housing market, to put a floor under a slowdown.

Yet a series of interventions by Chinese policy makers in their stock and currency markets are confusing investors as to their next policy move, and adding to investor sentiment that authorities are improvising as they try to stabilize markets and shore up the economy.

“It all now depends on what happens at 9:15 a.m. every day in China” when the central bank sets the yuan reference rate, OCBC’s Wiranto said. “It’s not a good time to make long-term forecasts.”

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