(Bloomberg) — Chinese stocks trading in Hong Kong fell the most in a week after the central bank cut the value of the yuan for a second day.
The Hang Seng China Enterprises Index in Hong Kong slid 1.1 percent to 11,138.24 at 9:55 a.m. local time. China Railway Group Ltd. led declines for industrial companies before the release of factory output data on Wednesday. Air China Ltd. paced losses for mainland carriers on concern a weaker yuan will increase the cost of servicing dollar-based debt.
The yuan was headed for its biggest two-day drop in 21 years on Wednesday after the People’s Bank of China’s reference rate was lowered to the weakest level since 2012. A surprise 1.9 percent cut in the reference rate on Tuesday sparked fears of an Asian currency war and damped bets the Federal Reserve will raise interest rates in September. Vietnam widened the dong’s trading band on Wednesday.
“The attraction of holding renminbi-based assets including shares, bonds and everything else decreases when the currency depreciates,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong.
The Shanghai Composite Index declined 0.2 percent. The CSI 300 Index was little changed. The Hang Seng Index in Hong Kong fell 1 percent.
Airlines were the worst performers in Hong Kong and Shanghai. Air China dropped 6.2 percent in Hong Kong, while China Southern Airlines Co. slumped 6.4 percent for a two-day, 13 percent retreat in Shanghai.
Economic Data
The yuan fell 1.7 percent to 6.4290 per dollar in Shanghai, after sliding 1.8 percent on Tuesday. The yuan devaluation couldn’t have come at a worse time for some Asian currencies. A measure of the region’s 10 most-traded currencies excluding the yen is set to decline for a third year, its longest losing streak since 1997, amid signs the U.S. will raise interest rates for the first time in a decade.
“The policy of weakening the yuan to boost exports may not be as effective because all other Asian currencies are competing. Also, a weaker yuan means weaker consumption power and Chinese demand for foreign products and commodities will weaken,” Wan said.
Industrial production probably grew 6.6 percent in July from year-earlier levels, down from the previous month’s 6.8 percent, according to the median estimate of economists surveyed by Bloomberg. Retail sales likely rose 10.6 percent last month, unchanged from the previous month, while fixed-asset investment edged up.
Yuan Devaluation couldn’t have come at a worse time for Asian currencies
(Bloomberg) — China’s surprise devaluation of the yuan couldn’t have come at a worse time for some Asian currencies.
A measure of the region’s 10 most-traded currencies excluding the yen is set to decline for a third year, its longest losing streak since 1997, amid signs the U.S. will raise interest rates for the first time in a decade. The People’s Bank of China’s cut its reference rate by a record 1.9 percent on Tuesday, triggering a global rout, and lowered it by 1.6 percent on Wednesday. Vietnam widened the dong’s daily trading band.
“This is like a double whammy with China allowing its currency to weaken,” said Wee-Ming Ting, the head of Asian fixed income in Singapore at Pictet Asset Management Ltd., which oversees $19 billion of emerging-market debt. “It will start a vicious cycle by different countries trying to depreciate their currencies.”
The yuan has been a source of currency stability in Asia during past crises and Chinese authorities propped it up earlier this year to deter capital outflows and make a case for official reserve status at the International Monetary Fund. China’s policy shift to support exporters and stem the deepest economic slowdown since 1990 heightens the risk of competitive currency devaluations as global demand wanes.
The Bloomberg-JP Morgan Asia Dollar Index fell 0.7 percent on Wednesday after dropping 1.6 percent Tuesday. The yuan was headed for its biggest two-day drop in 21 years after the PBOC cut its reference rate to the weakest level since 2012.
Currency Rout
The onshore yuan weakened as much as 1.7 percent to 6.4301 a dollar in Shanghai following Tuesday’s 1.8 percent decline, its biggest one-day loss in two decades. The central bank lowered its daily fixing by 1.6 percent to 6.3306, a 0.1 percent discount to the previous closing level of 6.3231. The yuan sank 1.6 percent in Hong Kong’s offshore trading.
South Korea’s won declined 0.8 percent to 1,188.88 and Taiwan’s dollar slid 0.3 percent to NT$32.17. Indonesia’s rupiah dropped 1.9 percent to 13,776, while the Philippine peso dropped 0.5 percent to 46.17. Malaysia’s ringgit sank to 3.9975, the lowest since 1998, and Singapore’s dollar slid to a five-year low of S$1.4149. Vietnam said the dong will be allowed to trade as much as 2 percent on either side of the central bank’s fixing, the same as the yuan, and up from 1 percent previously.
One-Time Adjustment
Though the PBOC called Tuesday’s change a one-time adjustment, foreign-exchange traders are pricing in more weakness in Asian currencies. Australia & New Zealand Banking Group is reviewing its year-end estimates for Asian currencies as the lender’s forecasts have already been reached.
“The market was caught off-guard by China’s move,” said Khoon Goh, a Singapore-based senior foreign-exchange strategist at ANZ. “We’re going to see ongoing volatility in the near term as the market tries to digest what happened. We need to see whether after the one-time devaluation the Chinese authorities are going to allow the currency to continue to depreciate.”
The currencies of South Korea, Taiwan and Singapore are the most vulnerable to a decline in the yuan as their exporters have the highest exposure to China in Asia, according to Barclays Plc, Standard Chartered Plc and Mizuho Bank Ltd.
Policy makers in Taiwan and South Korea are struggling to revive their economies amid a slump in overseas sales. Singapore on Tuesday slashed the upper end of its 2015 growth forecast as its export-dependent economy has been hurt by slowing growth in China, while uneven recoveries in the U.S. and Europe have damped demand for Asian goods.
Market Contagion
The yuan’s devaluation is adding to the woes of Malaysia’s ringgit, which was Asia’s worst performer this year even before the PBOC’s move. China was Malaysia’s largest trading partner in 2014. The ringgit has slumped 12.5 percent in 2015 as the oil- exporting nation grappled with weak crude prices and a political scandal involving Prime Minister Najib Razak. Indonesia’s rupiah has declined 10 percent.
As the region’s worst performing currencies, the ringgit and rupiah would be affected more, according Tim Condon, Singapore-based head of Asia research at ING Groep NV. “I think the contagion will hit them the hardest.”
A report on Saturday showed Chinese exports shrank 8.3 percent in July, compared with a Bloomberg survey’s median estimate of a 1.5 percent contraction. The yuan’s real effective exchange rate, a measure adjusted for inflation and trade with other nations, climbed 13 percent over the last four quarters and was the highest among 32 major currencies tracked by Bank for International Settlements indexes.
Tuesday’s currency moves “are a fairly reasonable reflection of people’s concerns about the currency-policy shift,” said Simon Derrick, the chief currency strategist at Bank of New York Mellon Corp. in London. “If we are going back to that kind of world, a world we’ve not been in for several years, then its entirely understandable people will themselves want to go for keeping their currencies competitively priced. It’s the race to the bottom argument.”
