Investment Clock insights

Coming to terms with China's new currency arrangements

Ian Kernohan

7 January 2016

We believe the lifting of share sales restrictions and currency depreciation were the major triggers for the New Year fall in China’s equity market.  Share sale restrictions have now been re-imposed, in an attempt to stabilise the situation.  The wealth impact of share price falls per se should be quite limited, given the low correlation between share price performance and GDP growth.  House prices have a much greater influence on households, and the main consumer indicators remained strong after the August stock market sell-off. 

Global investors seem to be more concerned about weakness in the Yuan, post the introduction of the new basket arrangements last month.  At the time, investors were warned to expect greater focus on the basket rather than the dollar cross, however the speed of move against the dollar has surprised.  Talk of China exporting deflation has returned, together with “they don’t know what they’re doing” and “they must have seen something bad in the economic data”.  It is likely that the People’s Bank of China intends to keep the Yuan stable against the basket, but allow it to fall against a rising dollar in a US Federal Reserve hiking environment.  With the economic data likely to be more difficult to read during Q1, thanks to China’s New Year holiday, greater clarity on currency policy will be needed to calm markets.

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.