Chinese checkers: Endgame some time away
1 min read . Updated: 20 Jan 2016, 02:09 PM IST
PremiumVolatility in the yuan has spilled over to other emerging market currencies, and investors would tend to demand a higher risk premium
The bloodletting from the Chinese carnage might not be over yet. Since the beginning of this year, when the People’s Bank of China started a second round of devaluation of the yuan, the Sensex has shed 6.5%. Last August, when the yuan was pegged down for the first time, Indian stocks had lost almost 12% in 20 days of trading.
It is not just about history repeating itself this time around. If anything, investors are more jittery now. In August, even if the devaluation was a surprise and the Chinese stock prices melted, there was some confidence that the authorities there would pull it together and be able to see the crisis through. But the problem has not been resolved for many months now and confidence is waning. It is not helped by what investors see as a lack of clarity when the Chinese central bank steps up now and then to prop up the yuan by intervening in the market.
Even fundamentally, things are not looking up, as fresh data shows. China’s trade volume fell 7% in 2015. Bank lending is slowing and the country’s Caixin manufacturing purchasing managers’ index contracted for the 10th straight month in December. Its foreign exchange reserves are depleting—some $700 billion from their peak—as it defends the yuan and because of capital outflows.
As a result, the economic growth momentum is slowing. The World Bank forecasts growth in China will ease further to 6.7% in 2016 from 6.9% last year.
A slowing down of growth in the world’s largest commodity importer will have spillover effects in other large developed and emerging market economies as well.
The volatility in the yuan has spilled over to other emerging market currencies, and investors would tend to demand a higher risk premium.
That is the reason the stock markets across the world are plunging.
In India, there seems to be no mitigating factor in the near term.
Local sentiment is down owing to a variety of factors such as a poor corporate earnings outlook, weak manufacturing numbers and so on. Thus, it wouldn’t be surprising if the rout in local equities has some way to go yet.
