Global financial markets have been rocked by China’s currency falling below an important threshold – and investors must consider action to protect their wealth and capitalise on the opportunities.
This is the message from Tom Elliott, International Investment Strategist at deVere Group, one of the world’s largest independent financial advisory organisations.
It comes after the Chinese renminbi fell to under 7 to the U.S. dollar on Monday – the lowest in more than a decade – igniting drops in stocks and emerging market currencies and driving a rally in government bonds.
Mr Elliott notes: “The nervousness in financial markets over the falling renminbi in recent weeks has reached panic levels, as the Chinese currency passes the psychologically important barrier of RMB 7 to the dollar.
“Just as in July and August 2015, when China engineered a small devaluation to support growth, global stock markets have panicked.”
He continues: “This has happened for three reasons.
“First, because a weaker renminbi will export deflationary pressure around the world’s manufacturing industries. Chinese goods, always competitive on price, will be even more competitive. This is therefore bad news for manufacturers outside of China, at a time when global manufacturing is struggling with weakening demand growth and the negative impact of the U.S-China trade dispute on their supply lines and profits.
“Second, with Chinese imports becoming cheaper, the major central banks’ efforts to energise inflation have taken a setback. And with it their attempts to ‘normalise’ interest rates, unwind quantitative easing and escape the black hole of negative real interest rates. Indeed, the size of the Chinese export sector means the direction of the renminbi is a key calculation when economists attempt to forecast global prices.
“Third, unlike the summer of 2015, the devaluation occurs against the background of a trade war with the U.S.”
For investors, the major question now is ‘How will the U.S. respond?’
“Policymakers in Washington will be wondering if Beijing’s refusal to intervene more heavily in the currency markets to support the renminbi is a strategic decision to put pressure on the U.S. in regard to the trade talks. Is it an ‘aggressive’ devaluation? If they conclude it is, we can expect furious reaction from Trump,” says Mr Elliott.
“Or is it that Beijing sees a weaker currency as inevitable, given China’s slowing growth? After all, currencies do go up and down, why should China be different just because we have become used to it being managed in the past through currency intervention.
“It would be ironic for the U.S. to be demanding a more liberal attitude towards trade from China, but to object to China’s currency being allowed to find a new rate in line with market conditions.
“If Washington takes this line, investors can sleep a little easier.”
The International Investment Strategist concludes: “It is worth perhaps remembering the investor’s mantra: where there is chaos, there is opportunity.
“Investors are urged to check their portfolios to ensure that they are best-positioned to capitalise on current opportunities and sidestep the risks.”