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Press, Journal Article
Economies and Markets
CHINA AFTERSHOCKS RATTLE
GLOBAL MARKETS
Nick Beecroft
Portfolio Specialist,
Asia ex-Japan Equities
PRICE
POINT
February 2016
Timely intelligence and
analysis for our clients.
EXECUTIVE SUMMARY
Once again, developments in China have reverberated across global equity, currency,
and commodity markets and revived fears that surfaced after
China’s surprise currency
devaluation and stock market crash last summer.
Markets likely will remain volatile, China’s economy will continue slowing, and the
country’s currency may weaken further. However, T. Rowe Price does not anticipate
an economic hard landing or a financial crisis in China.
Moreover, the recent turmoil in China’s market does not
change our constructive
longer-term view of prospects for investing in China and Asia more broadly.
THE CURRENCY
The Chinese currency, called the renminbi, has been under pressure, especially since
a devaluation by China authorities in August of last year took investors by surprise. At
the end of last year, its value also began to be pegged to a basket of currencies
instead of solely to the U.S. dollar, which implies a further devaluation. The dollar has
been appreciating against most major global currencies, and the renminbi recently hit
its lowest level versus the dollar in five years.
The potential for a further unexpected and sharp decline in the renminbi is the key
current risk in China, as this could hasten continuing capital outflows from China and
put more pressure on its economy. Once global markets believe that China’s intent is
to weaken the currency, it is very difficult to control the forces that seek to take
advantage of that move.
Our expectation is that China will let the renminbi float within limits against the new
basket of currencies, and that would suggest downward pressure this year, but in a
fairly controlled fashion. However, managing that devaluation process is difficult to
achieve. The government may need to continue drawing on its significant foreign
exchange reserves to defend the currency over the coming quarters. China can afford
to do this for a while, but not forever.
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