Our chief economist, Eric Fishwick, expects forex-reserve depletion to prompt Beijing to let market forces determine the value of the Chinese yuan, which is currently around 6.5 to the dollar. Removing controls is likely to trigger depreciation and Eric forecasts a precipitous fall to eight or even nine yuan per US dollar in 2H17, before a return toward current levels in 2018.
In the interests of preparedness, our Head of Asia and Thematic Research, Amar Gill, has commissioned a wide-ranging report into the potential impact of an “RMB8” scenario on markets and sectors in both China and beyond.
As China invented paper, it was the first country to introduce paper money. The yuan was the first paper banknote in the world.
A yuan is a Chinese dollar – the symbol hails from the Qing dynasty, meaning ‘round coin’. Renminbi is a collective noun that means ‘people’s money’.
The renminbi was first issued in 1948 by the Chinese Communist Party’s People’s Bank of China as a unified currency for use in Communist-controlled territories.
All the renminbi banknotes including the 1, 5, 10, 20, 50 and 100 notes feature the portrait of Chairman Mao with a different Chinese landmark on the reverse.
From 1997 to 2005, the Chinese government pegged the currency at about RMB8.3 per US dollar, despite criticisms from the United States.
Since 2006, the renminbi exchange rate has been allowed to float in a narrow range around a fixed base rate determined by a basket of world currencies.
In spite of China’s economic growth over the years, the largest denomination banknote remains 100 renminbi, which is equivalent to about US$15.
In December 2013, the renminbi overtook the euro to become the second most used currency in global trade finance after the US dollar.
Obviously, this would cause major disruptions in China and volatility for the markets. It is clearly negative for the property sector with significant US$ or HK$ debt, similarly for airlines. Developers in a hurry to liquefy their balance sheets will rush to push out sales, ie property prices could fall 10% fairly quickly.
For Hong Kong, it would be a mini-replay of 1997. HK dollar selling pressure will mean the Hong Kong Monetary Authority would have to support the HK$ by buying the currency, which pushes up interest rates. As a result, Hong Kong becomes more expensive regionally. Property prices could fall 15-20%. Commercial properties become unattractive too for the mainland Chinese. Mainland tourist inflow and HK retail would be decimated while the renminbi is falling.
Impact of a weaker RMB on Asian markets. Click on each market for more insights.
The airlines, utilities, property, and construction sectors will be most impacted by RMB8.
The secondary impact to consumer confidence, potential capital flight, bankruptcies, unemployment, NPLs and political risk could be unimaginable.
The government is unlikely to raise
interest rates as this would cause a property correction.
If the yuan tumbles, the first thing Chinese tourists would do is cut long-haul flights to Europe, rather than the short trip to the discount store around the corner that is Japan.
Automakers are likely to continue to purchase their high-grade steel from Japanese steelmakers.
The big losers from a weak yen would be electric power generators as well as some retailers.
A depreciating renminbi is likely to have a negative impact on Korea’s export market share.
This is because Korea largest trade
partner is China both in terms of exports and imports.
Korea’s net exports to China are driven by technology. Other major exports are petrochemical products, machinery and auto-related shipments.
A weaker Taiwan dollar would lead to negative wealth effects, lower utility costs, capital outflows and FX translation gains.
Our analysis suggests technology, textiles and other manufactured exports to developed markets would gain.
However, financials, F&B, telecoms, consumption and China-centric manufacturers (eg, machinery, auto components) would suffer.
Renminbi weakness will put pressure on Indonesia’s export, which is also decelerating due to low demand for commodities from China.
Overall, the country still benefits as it is a net importer with China.
However, if the rupiah weakens, the consumer sector will be most impacted given a good chunk of COGS is imported.
A weaker peso should be positive for trade accounts as it will make Philippine exports relatively cheaper and imports relatively more expensive.
Recipients of OFW remittance and BPO revenue should benefit as US$ proceeds should translate to more pesos and thus, more consumption.
Key loser will be the government, via higher debt servicing of its foreign currency obligations.
A RMB8 condition will see Thailand importing more from China.
Chinese tourists to Thailand will grow slower.
A weak yuan and baht helps US$ earners like food exporters, hotels and healthcare.
Contractors and consumers will enjoy cheaper building material and consumer products from China.
RMB8 would have serious negative implications to regional demand, world trade, commodity prices and tourism -
all of which weigh heavily on the Singapore economy.
This weakness would weigh heavily on the market and the banks, planters & traders, developers and Reit sectors.
The telco sector, with no China exposure, would be most defensive.
Bank Negara has historically steered the ringgit lower in tandem with renminbi weakness.
A weak currency will boost exporters and tourism plays.
Conversely, corporates with US$ costs but non-US$ revenue will see margin squeeze.
Sharp renminbi depreciation would hurt the rupee, despite its better fundamentals.
India’s large trade deficit with China could widen, while sentiment towards emerging markets would weaken.
A sharp decline by the rupee would
impact banks, capital goods and metals. But exporters (IT services, pharma) should benefit.
A weaker Aussie dollar given the link between the two economies.
Renminbi depreciation is negative for US$ commodity prices where China is a marginal producer – thermal coal and aluminium are most vulnerable; steel and nickel may also be impacted.
Defensive sectors like telecoms and healthcare are likely to be the best places to hide.
While the direct impact of a material depreciation of the renminbi is likely to be small, the indirect impact could be substantial in the form of additional revenue pressure and asset quality deterioration.
We expect a weaker renminbi to make oil imports more expensive, negatively affecting sentiment and demand.
With a weakened renminbi supporting lower-for-longer oil prices, downstream energy stocks should fare better than upstream.
Parts-makers with some export exposure would likely be the best ways of playing this forex dislocation. This is because they would have a renminbi cost base, but a global based revenue source, and so benefit on export margins.
In consumer tech hardware such as PCs, smartphones, TVs, China represents 22% of global demand and we expect that a 25% renminbi depreciation will lead to a 20-25% contraction in unit demand.
