The Chinese yuan might weaken further this year — reflecting its overvaluation and China’s economic slowdown — but the pace is to be modest to as Beijing tries to avoid volatility in financial markets and corporate debt payments, JPMorgan Asset Management said yesterday.
The yuan might shed 4 percent to 5 percent this year after having lost 5 percent since August last year, said Tai Hui (許長泰), JPMorgan Asset Management’s Hong Kong-based chief strategist on Asia.
“The Chinese currency is poised for a sustained depreciation amid an ongoing slowdown… It will not move in one direction as it has in the past and investors have taken note of the trend,” Hui said at a news conference in Taipei.
Exports from the world’s largest trading nation fell a better-than-expected 1.4 percent last month year-on-year, a figure that market observers have said has been artifically boosted as some Chinese firms buy imports in yuan and then dump them overseas at a loss, thus boosting their foreign currency reserves and evading government controls on the movement the yuan.
Some observers have speculated that China might take steps to soften its currency dramatically in a bid to stimulate exports and the economy as a whole.
JPMorgan dismissed the benefits of such a move, noting that a depreciation in the yuan of 10 percent or more would be necessary to boost exports and the knock-on effects of such a measure would be disastrous.
A steep currency depreciation would accelerate capital outflows and stem fund inflows, a situation that would be unfavorable for stock markets in China and corporate debt payments, Hui said.
“Default risks would increase as Chinese companies would have to pay more in borrowing costs,” Hui said.
The yuan should stabilize after the fluctuations seen in the past week, with the pattern likely to be repeated for the first three quarters of this year, the economist said.
The yuan might find support as China’s hosting of the G20 summit in Hangzhou in September draws nearer, Hui said, adding that the currency would also receive a boost in October when its inclusion into the IMF’s reserve currency basket takes effect.
JPMorgan recommends a diversified portfolio for this year that would feature low returns but high risks.
With the US’ economy recovering, US stocks are quite expensive, limiting opportunities for profit, Hui said.
Oil prices, interest rate hikes by the US Federal Reserve and China’s slowdown would continue to swing global financial markets, but it remains to be seen how the drama pans out, the economist said.
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