Chinese fear engulfs market: How worried should you be?

On CNH, I think people are getting more nervous because they were thinking that central bank could again keep the devaluation pace relatively gradual but now it looks like it is not the case. If such nervousness is spread through the household segment, I think then the household will take CNY to exchange for US dollars. That will accelerate the pace.

Latha: Will you expect therefore competing devaluation by other Asian currencies? For an Asia equity investor, what should one learn? I think already as a consequence of the official fixing coming lower, crude has already started falling. I even saw USD 33.89 per barrel reading on Brent crude a while back, so do you think across Asia you will see equity investors even commodity investors beginning to mark things lower?

Bei: I think so because even though people had expectations on the weakening Chinese yuan but I don’t think anybody estimated such a fast pace [of the decline] under such magnitude in past several days. So that means that the China's importing power is getting weak after a devaluation after the currency and it is impacted the importing power that will affect all the Asian currencies. My view is that it would be similar to the August case that if Chinese yuan devaluates, a majority of the emerging market currencies need to follow at least at the same magnitude of devaluation, which will create some volatility in the regional market.Nigel: What is your reading this morning the big fear factor was the devaluation of the yuan, what is your take, are we likely to see more such signs and what kind of impact can you have not into the Chinese economy but also to the global environment?Cheung: I think definitely there is a lot of risk aversion at this point given the move of the Chinese yen. This morning we had higher than expected 6 again and we will be watching the afternoon close for the 6 because what happens is that we have this 6 heading quite a lot higher and 6 also coming higher than our modern prediction. So that ticks dollar-CNY higher and so it has impacted other Asian currencies particularly dollar Singapore and it has been trading higher and there is a risk aversion as you can see that dollar/yen has collapsed and has begun below 118 this morning.Ekta: Can you take us through the live rates on other currencies in Asia for example, the Malaysian Ringgit you alluded to the dollar Singapore as well, can you tell us what kind of depreciation levels are we seeing right now?Cheung: For the ringgit, it is now being driven by oil prices because we have seen a new low in oil prices again. The market is basically looking at the slump in oil prices and you can see that dollar-ringgit has been going up quite fast in the past couple of days and it is now heading towards the high that we saw last year.Latha: How would you read the Chinese devaluation, are we going to see a round of currency falls across Asia? Mackel: First and foremost I don’t believe that China is devaluing its currency; that is I think a very different definition interpretation of what currency devaluation should be. It should be substantially bigger than what we have seen thus far. The message over the last few weeks for some time now is that the Chinese authorities have been signaling that greater flexibility in the exchange rate was going to be likely and we are witnessing it this week even more so. So, yes, it is leading to considerable uncertainty right now not only in terms of how the renminbi is trading but also how other Asian currencies are trading. I do believe it is going to still be at risk to unsettling at least for next few weeks or so.However, eventually, I expect transition in terms of where this type of market fear will eventually subside and calm down and will start to recognise that this is a normal transition for a currency that if it wants to be treated or seen as joining the big club with other major currencies like the dollar, euro and yen that has to flex it, it has to behave more independently._PAGEBREAK_Reema: If the yuan’s moves are just part of it getting transitioned into being included in the other basket, do you expect it to be set lower every single day even if it is part of just transitioning? Where do you expect it in the next three months?Mackel: This fix is market oriented perhaps this week. If you look at the pattern since August 11 last year, it has been very market determined based of the local Beijing 4:30 close for the spot rate. So, can we say that this is just going to continue to be marked higher that is for the dollar to be strengthening to the 6, day-after-day? I find that unlikely. I think that the whole point is to try and let the market determine where dollar versus renminbi should be set; this is what the authorities want. They don’t want one way depreciation view emerging for the renminbi, I definitely don’t think it is designed to try and support growth or anything along those lines. It is about trying to introduce greater flexibility for the exchange rate. You have to have this for China, it is absolutely necessary.Latha: How would you read this extra large devaluation by the People's Bank of China (PBoC) this morning?Glassman: I think what is going on is because the Federal Reserve is now in a tightening mode. China doesn't want to mimic that and so they have said for some time that they are going to try to decouple the link between the yuan and the dollar. However, if you look at what happened to China's currency and trade-weighted basis, even though China devalued in August, the currency is still up in real trade-weighted return, so what is going on here is a further attempt to try to offset the impact that comes from the currency that is rising. We have been through this story once before, I do not think it's a great danger for the world economy and we are trying to exaggerate the significance of the Chinese economy and the world economy because the reason China's economy has contributed so much to global growth is because international businesses are locating operations in China, so China cannot do a lot of this. China's domestic economy is doing fine but what is happening is that because China's currency over the last ten years has risen almost 60 percent is real trade-weighted return, so China is becoming much less appealing as a place to locate operations and I think what is happening with China is running into is because this is becoming less attractive. A lot of operations are shifting elsewhere like Vietnam, Indonesia maybe Bangladesh and we just don't know where all that shift is taking place but to me it doesn't mean that just because China is slowing down the global economy is in trouble. I think what is happening is China's slowdown is accompanying a shift away from China and we do not know where that entire shift is. So it is more a story about China's challenges than it is about the global economy. I think it is hard to see that because China is visible but it is very hard to know where all the shifts are taking place. So for now the markets are nervous about it but we went through this story before and turned out not to be as dangerous, back in August.

Anuj: What if this is not just a scare and actually the start of a bear market in global equities. What is the probability of that?

Glassman: I think it's probably low probability because markets are not cheap globally but in my mind in the background we have got economies that are still recovering, inflation is extremely low and that allows central banks to be friendly or if indicated, Federal Reserve move very cautiously. So I personally think the idea of a global downturn is not likely because we still have a lot of stimulus in place from the developed economies and when you look at the US, I think this is a story that we see all around the world. I think the big thing is that we had oil prices collapsed; now that does a lot of harm to the oil industry, oil countries, oil industries and in the US we see the industrial sector is very weak, the drilling activity is down 60 percent, so it is hitting the investor sector badly but it is helping the consumer sector and the service sector and in fact countries like India, China, US, Europe, we all use more energy than we produce for ourselves, so what that means is when energy prices come down, more people are benefiting. I think right now though we still have a lot of negative news and it is hard for people to sort out where are the offsets, but when we look at the US, we see employment trend continuing to raise, people cannot figure out why is the economy doing as well as it is when you see all these negative news and we are going to get more information later this week but we already had some hints that employment range is still very strong and that is just a reminder that there are people who benefit from event like this, there are people who surprise from events like this but on that it is net positive which is showing on the commodity world at least in the energy sector and net positive for countries that use more oil than they produce.

Latha: The morning has brought a lot of news, how would you interpret this 0.56 percent devaluation? What may the impact be?

Farris: The key thing is that the effects are coming above what most people’s models would suggest the fix should be doing and equally they are now pushing the basket that the government announced late last year, lower and toward levels that would suggest that if it breaks down and depreciates on a basket basis. And all of that increasingly suggests that what they are doing is actually just depreciating the currency, presumably in some sort of controlled fashion but 0.5 percent move on multiple days for the Chinese renminbi is really pretty large. It is suggestive of them trying to move the currency fairly quickly to some sort of new level that they want. The market does not know where that is. There is very little guidance and as a result of that, the market has to assume in some senses worst case scenarios and that is going to perpetuate this uncertainty in bearish environment.

Reema: When there was a scare last August, we saw the Chinese authorities soothe the nerves and they dismissed all fears of a sustained depreciation. This time around, do you expect any reaction from the PBoC?

Farris: The PBoC has reacted in a sense that they have been intervening, capping the move in the USD-CNY and to some extent also the USD-CNH but at the same time, they are the agent creating the USD-CNY fixes. So, what you are left concluding is that they are doing a controlled devaluation of the currency; they are choosing how much to move it on a daily basis but they are continuing to move in one direction.Watch accompanying video for more details.