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China Currency

For the second time in less than six months, market turmoil in China has rattled global financial markets sending stock markets across the world into a tailspin. The trigger was a depreciation of the Chinese yuan.

For the second time in less than six months, market turmoil in China has rattled global financial markets sending stock markets across the world into a tailspin. The trigger was a depreciation of the Chinese yuan after data showed another slowdown in Chinese manufacturing. While the cause of this selloff is uncertain, the implications of this second round of anxiety are ominous for the rest of the world, according to investors.

The tremors set off by the 1 percent fall in yuan echoed the China-triggered turbulence of last August. The latest slide in the yuan triggered a sell-off in Chinese stocks to activate the badly designed “circuit-breakers”, which suspend trading when the benchmark CSI 300 index moves more than 7 percent, twice in the span of one week.

While China’s major stock indexes regained some ground on Friday, Beijing letting the yuan depreciate faster has raised concerns that it might be aiming for a competitive devaluation to help its struggling exporters. Some investors fear that is a signal that its economy is even weaker than had been imagined.

Broadly speaking, there are two competing views of the recent market activity. The first view is that the scramble by Chinese authorities to boost exports by devaluing the currency is the best of various bad options to address the country’s economic troubles. Alternately, while a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers, heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest, while at the same time increasing economic risk for export oriented economies throughout Southeast Asia.

On Monday, these issues were again at the epicenter of market unease as the People’s Bank of China confounded analysts by guiding the yuan’s midpoint rate sharply stronger, a move that might calm concerns about a competitive devaluation but only added to market confusion as to Beijing’s ultimate intent on its currency policy.

These perceived missteps by the authorities in managing the share and currency markets have led to concerns Beijing might lose its grip on economic policy too.

Last year’s bungled stock market intervention and mini-devaluation punctured the myth of Chinese bureaucratic infallibility. The latest gyrations reinforce the beliefs of some investors that officials are struggling to reconcile contradictory demands: promoting market forces while preserving stability; and rebalancing the economy while continuing to meet increasingly unrealistic growth targets. Either way, the conundrum caused by this maket upheaval has investors increasingly assuming the worst – that China’s economic managers are losing their grip on the world’s second largest economy.

At Aurigin (formerly BankerBay), we think it’s important to keep some perspective on these latest market gyrations. Clearly, the Chinese economy has been slowing down for some time now and although it would be foolish not to pay attention to this, it is equally unwise to focus solely on it – there are many other global factors to consider as well. In October, Aurigin CEO Romesh Jayawickrama highlighted in an interview with Lee Pacchia of Mimesis Law (watch full interview here), that the August selloff in global stocks was not a systemic slowdown but a relatively healthy and much needed corrective move. And the correction will in turn, be beneficial for deal flow, according to Jayawickrama, as it will pull valuations back to attractive levels for robust deal activity.