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Article / 11 August 2016 at 14:57 GMT

One year after the Chinese devaluation

Managing editor, / Saxo Bank
  • China – one year on from the devaluation that shook the world
  • Subsequent equities & oil crash hit darkest day on Black Monday (Aug 24, 2015)
  • USDCNH has since depreciated by a further 5%
  • Potential for further shock remains but markets have been resilient


 All 'quiet 'on the Chinese front one year after
the devaluation that shook the globe. Photo: iStock

By Martin O'Rourke

Do you remember the headlines one year ago? China's dramatic devaluation of the yuan after its central bank set a fix of 6.3305 per dollar signalled an about turn in Beijing policy towards allowing a greater degree of market forces interplay with the exchange rate and set in motion a risk-off whammy that spread like wildfire through global markets.

At the time, John J Hardy, Saxo Bank's head of forex strategy said: "It's quite remarkable. Since the days of the global financial crisis it [CNH] has appreciated in the order of 50%-plus on a trade weighted basis." 

Brent and WTI crude respectively were at $48.96/barrel and $44.43/b on August 11, 2015.
When Black Monday struck on August 24, the respective marks were $44.28/b and $39.08/b.

The Shanghai Composite Index suffered a 9% fall on the day (it went on to fall nearly 30% in the space of two weeks before eventually hitting a 52-week low of 2,638.302) and Asian stocks plummeted to three-year lows.

It was carnage on the global indices too. On August 25, the FTSE 100 stood at 5,898.87, S&P 500 was at 1,893 and both Dax and Dow were well below respective marks of 10,000 and 16,000.

Saxo's head of equities Peter Garnry was also in battle-weary mood when he called in to Morning Call on August 24. "It's been a tough couple of weeks in equity markets.There's been a brutal selloff and the last two weeks in US equities has been the toughest since the financial crisis. It seems like a vicious cycle that is feeding on itself."
The rush towards safe-haven assets meanwhile sliced more than 3% off USDJPY in the 13 days to Black Monday's 121.00 (go figure!) at 0655 GMT, and gold over the same period rose nearly 4%.

The fallout forced the Federal Reserve pretty much immediately to abandon plans for a September rate hike and set in motion a process where a hamstrung and overburdened Fed has simply been unable to push forward with the kind of rate-hike cycle blueprint originally laid out in Janet Yellen's war room.

The devaluation of the yuan one year ago and the steady USDCNH climb ever since


 Source: SaxoTraderGO

Fast forward one year and the process of devaluation in the yuan has gathered pace with a USDCNH rate of 6.46 at 1312 GMT, yet markets seem to have staged a remarkable recovery.

Even allowing for the Brexit shock, FTSE 100 is some 1,000 points higher at 6,866, the Shanghai Composite Index is once again re-established above 3,000, the S&P 500 closed at 2,175 last night and Dax and Dow closed at 10,650 and 18,495 respectively.

USDJPY meanwhile has gone on to power down towards 100.0, gold has come close to threatening $1,400/oz and government bonds well-documented move into low-yield territory are perfect symbols of a world where risk-off has become the predominant theme of the 12 months ever since.

What can we glean from this? China's GDP has remained steady at projected targets within the avowed 6.5-7% range (it posted 6.7% for the first half of 2016), and the market fear that prevailed at the turn of the year as to the fortunes of the Middle Kingdom has lessened in the wake of what seems to have been a steady hand at the Beijing tiller.

There is a raft of data coming out of China tomorrow that might make the picture clearer, however. Fixed asset investment and industrial output prints will certainly offer clues and the sense that all is not well in China continues to pervade. 

Could Beijing unleash yet another shock on the markets like August 11, 2015? If January 7 this year is anything to go by, then it could. A market meltdown induced by circuit breakers effectively saw a replay of the August 11 fallout as the SHCOMP plunged 7.32% down and CNH failed to respond to some $10-billion worth of People's Bank of China intervention.

China abandoned circuit breakers within 24 hours and the PBoC moved sharply to end a USDCNH slide to 6.7600, with indices across the board taking a beating in the immediate aftermath.

But, if there is one thing markets have demonstrated in the last 12 months, they are increasingly resilient to shocks. The plunge in the oil price, the gold crash last summer, oil's dramatic slide to well below $30/barrel and of course Brexit have all demonstrated that even in a risk-off environment, the bounce-back ability is there and while easy money has something to do with that, it doesn't necessarily explain the whole picture.

Nevertheless, China as a market-moving factor dwarfs all of the above combined. And the sense that Beijing continues to pave the ground for yuan to eventually rival dollar also underpins a battle for supremacy that should become ever more stark in the coming years and potentially fractious, volatile and market moving.

And, let's face it, a weaker CNH is always a useful tool in stimulating exports and keeping domestic producers happy. And, at the back of policymaking decisions in China, there is always the careful eye trained on domestic harmony and the production of wealth as part of the social contract that effectively holds the modern Chinese system together.


China's social contract with the people ensures wealth
stimulation remains at the heart of policy making. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank


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