'Seismic shift': How China's rising financial strength poses a threat to its regional neighbours

(Kevin Frayer / Getty Images)
  • Outflows from Asian emerging markets just rose to the highest level since 2013.
  • But over the last 12 months, $US42 billion has flowed into China as it continues to integrate with the global economy.
  • UBS said that could weigh on the currencies of China’s neighbours including India, its biggest regional rival.

UBS warns there could be further falls in store for emerging market currencies across Asia.

Strategists Rohit Arora and Fiona Lake said the Indian rupee, Indonesian rupee and Philippine peso could be the biggest losers.

And such a move could exacerbate existing pressures at a time when the current account deficits (CADs) of those countries are already widening.

The recent pressure on emerging market currencies sparked a brief market panic in August. More broadly, the moves were attributed to strength in the US dollar as the Fed continues to raise interest rates, and a declining global growth outlook.

However, the UBS strategists highlighted a different catalyst: The rise of China, as its economy becomes increasingly connected to the global financial system.

For example, Chinese stocks ripped higher on Wednesday after reports a key global stock pricing benchmark — the MSCI index — was increasing the weighting of its China allocation.

The MSCI first announced that mainland Chinese stocks would be included on its index back in June 2017. And Arora and Lake said a “seismic shift” is now underway as more global capital pours into China.

At the same time, portfolio outflows from Asian emerging markets (AXJC) totalled $US24 billion over the past three months.

That’s higher than the outflows around Trump’s election victory in Q4 2016, and the panic caused by China’s currency devaluation in Q3 2015.

Chinese markets are included in the AXJC category, but this time there’s a twist: “Since June 2017, China has enjoyed the lion’s share of regional equity inflows,” UBS said.

UBS Bank

“Data for the past 12 months shows $US42 billion of inflows into China, versus $US27 billion of outflows from Asia-ex-Japan and China.”

That attributed the shift to the ongoing liberalisation of China’s economy, as well as a solid earnings backdrop.

Conversely, the biggest outgoing rotations have occurred in Indonesia, the Philippines and India.

And those three countries are already dealing with higher current account deficits, due to the dual effects of higher oil prices and slowing growth. As such, “collateral damage is least welcome in these countries”.

Here’s a summary of how UBS expects the rise of China to impact the currencies of its regional neighbours:

UBS Bank

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