The China story has never been straightforward with bumps expected along the way
The 4% depreciation thus far is probably insufficient. If depreciation pressure persists, how long the currency can stay expensive depends on the size of China’s foreign reserve war chest. Foreign reserves stand at around US$3.6 trillion. From 3Q 2014 onwards, it has been draining at a rate of around $25 billion a month, with some acceleration in July and August. As the cost of holding the line becomes too high for the authorities, the CNY will most likely be allowed to depreciate based on market forces. While further depreciation may come as a shock to market observers, we believe it is beneficial to China. It offers China a greater ability to cut interest rates and improves its export competitiveness. However, the impact on competing economies will be less favourable. In uncertain times, the opportunity-set opens up for a stock picker, as strong businesses with long-term growth trajectories in the region are starting to trade on very attractive valuations. These companies will be bigger in 3-5 years’ time, even in a slower economic growth environment. Read more at (VIEW LINK)
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