http://www.marketwatch.com/story/the-sharpest-moves-by-chinas-yuan-may-be-behind-it-2015-08-13The yuan’s sharpest declines are probably behind it, according a two currency strategists from Nomura.
The yuan’s USDCNY, +0.2114% rapid depreciation over the past few days, combined with the recent decline in China’s foreign-exchange reserves, has reminded some investors of the Asia crisis of the 1997, the analysts said. The currency has shed about 3% of its value against the dollar since the People’s Bank of China announced the shift to a more market-oriented exchange rate on Tuesday — it’s largest decline in two decades.
But according to Jens Nordvig and David Fritz, two global currency strategists at Nomura in a Thursday research note, China has more than enough firepower to manage the yuan’s devaluation.
An analysis by Nomura of China’s outstanding foreign-currency denominated debt shows that its reserves, which remain the largest in the world, could pay off the debt more than three times over, leaving plenty left over to support the yuan.
This means that Chinese policy makers will likely stick with their well-known penchant for gradualism, the analysts said.
Ahead of the Asian crisis of 1997, emerging economies in the region racked up massive debt burdens. The chart below compares the foreign-currency debts of Malaysia, Indonesia, Thailand and South Korea in 1996, shortly before the crisis broke out with China’s current debt burden.
The biggest risk to the country’s capital account, according to the Nomura strategists, would be if China’s domestic savings become unstable as investors move capital out of the country. China’s balance-of-payments data show some evidence of this the strategists say, but there is no indication that it’s the main driver of the country’s balance-of-payments deficit.
The PBOC has said it would be vigilant in preventing money from leaving the country illegally, but the best strategy in staving off capital flight is to prevent large fluctuations in the currency, the strategists said.
This is all the more reason to push for steady exchange rates.
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The point of all this, the point NO ONE is seeming to grasp in the meia, is that this is the first time China doing something has had an immediate and sharp effect on the world markets. Often times if it did have any effect at all it was over days or weeks of some extreme move, and the effect was minor. This time it was instantaneous and large.
Make no mistake - China has arrived on the world financial scene. From here on out it Shanghai will be a major financial mover along with Tokyo, London, and New York. Which is a bit scary because their financial system is still rather immature, so expect them to bring a great deal of volatility in days to come.
