Has the Market Overreacted to China?

Guild Investment Management |

The media thinks it’s big news from China that the Yuan has fallen in US dollar terms by four percent as of this writing. Those who know the facts realize that this isn’t big news. The Chinese currency today sits 33% above where it was 10 years ago versus its trading partners. In other words, the Yuan has appreciated by 33% versus the currencies of its major trading partners. It has risen by 26% versus the US dollar during this same period. 

All that China is doing by letting their currency fall is saying, “Our currency has gone up so much that we’re having a hard time exporting goods. We can export plenty if our currency goes from 33% above the level of 10 years ago to, say, 25% above. So we’re going to let our currency give back some of its huge gains.”

Yuan_Appreciation.jpg

Here at GIM we are saying:

Don’t worry -- China does not plan to devalue their currency too much. A major devaluation would serve none of China’s long-term goals, which include (among others): 

  1. Being part of the IMF back-up currency regime for SDRs along with the U.S. Dollar, Japanese Yen, Euro, and British Pound; 

  2. Having more influence in global trade and business decisions; and 

  3. Having Chinese stocks included in world stock market indices proportionately to the size of China’s economy. (Currently, Chinese stocks comprise a much smaller part of these indices than the size of the Chinese economy would warrant.)

Investment implications: Media panic and hype over China’s decision to let the Yuan respond more freely to market pressures are very overdone. We do not believe a major devaluation of the Yuan is in the cards, because it would not serve any of China’s long-term strategic goals.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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