1. China's Weaker Yuan will Drag Down Emerging Markets
- In August, the yuan declined for a sixth consecutive month, capping the longest losing streak since the height of the trade war sparked off by the Trump administration in October 2018.
- A cheaper yuan is hammering the export appeal of other emerging markets and sparking competitive devaluations
Foreign currency is really not that complex. The more expensive your currency is relative to everything else (primarily the dollar), the dearer your exports and vice versa.
For the bulk of export-oriented economies, keeping their manufactures cheap means keeping their currencies cheap, and nowhere has this become more urgent than China.
Although the Chinese yuan was reigning supreme as the haven asset for emerging markets, shielding investors from the turbulence of war and runaway inflation just months ago, it’s rapid decline versus the dollar is rattling emerging market currencies that are caught in a Catch-22.
In August, the yuan declined for a sixth consecutive month, capping the longest losing streak since the height of the trade war sparked off by the Trump administration in October 2018.
But a cheaper yuan is hammering the export appeal of other emerging markets and sparking competitive devaluations, as far away as Africa and Latin America who need to keep their exports competitive but also manage rising inflation and a weak currency importing price pressures.
One view is emerging markets that compete directly with China on exports, for instance Vietnam and Bangladesh, will allow their currencies to decline to keep prices competitive.
In the past month, China’s zero-Covid policy, ballooning property crisis and growth slowdown are fueling an exodus of foreign capital, even as domestic inflationary expectations surge.
The yuan was set to fix at a stronger-than-expected level for the ninth straight session as China’s central bank pushes back against its currency depreciation, but the dollar’s strength and the U.S. Federal Reserve’s hawkishness is undermining Beijing’s defensive tactics.
China will report data for August that may show declines in China’s foreign reserves and export growth, alongside a deceleration in services.
But emerging market currencies, especially manufacturers that compete with China, may see their currencies slide further in a race to the bottom that helps no one other than the U.S., which imports these cheap goods.