China’s shock currency devaluation started last week but it isn’t over, according to a note from Barclays analysts.
They see the yuan falling another 10% against the dollar, with China selling off more foreign exchange reserves to keep the price down.
As it stands there are 6.3950 to the dollar according to data from Bloomberg, but Barclays sees this moving to 6.8 by the end of the year and 6.90 by the middle of 2016.
It’s all down to capital outflows.
As China’s economic miracle unwinds, rich domestic investors are tempted to take their money overseas.
By devaluing its currency, China’s central bank makes doing this a lot more expensive and so the country can keep hold of its wealth more easily. That’s the plan at least.
Here are the main points from Barclays (emphasis ours):
- The depreciation of the currency isn’t aimed at supporting exports as we see this channel as fairly ineffective. Instead, a 10% bilateral depreciation may help balance capital outflows in conjunction with a still-substantial commitment to FX intervention in the coming months.
- Both the currencies of countries with a high degree of third-country export competition (Thailand and Korea) and those with a relatively high export share to China (Taiwan, Korea again and Malaysia) will face pressure to weaken.
- If the US policymakers delay an interest rate rise due to risks from China, it is even more likely that other major central banks’ policies will push back tightening or move toward outright easing.
Here’s an inverted yuan to dollar chart to put the recent devaluation in perspective for the year, courtesy of Bloomberg: