As an investor, one should be cautious on China in 2016, in the wake of the country's currency falling to a six-year low to 6.6564 to the US dollar, believes Shaun Rein of China Market Research.In an interview with CNBC-TV18, Rein said he expects to see "massive outflows" from China following renewed volatility that has engulfed the country's stock and currency markets, amid renewed concerns of an economic slowdown.Rein added that he, however, did not see a major impact coming out of the yuan devaluation on Chinese imports. China recently moved to a managed float regime for its currency, something that has put downward pressure on the renminbi. Below is the verbatim transcript of Shaun Rein's interview with Latha Venkatesh & Sonia Shenoy.
Latha: Would you fear that there could be more depreciation. Is that how market will read lower fixing and the bigger offshore discount?
A: There are two areas. First, the gap between the onshore and the offshore trading; a lot of offshore investors think that renminbi will continue to depreciate and that's true. I think there are two things; weak manufacturing data shows that the Chinese economy is still quite weak on the manufacturing side, but most importantly we are going to see massive capital outflow pressures in January this year.
Mainland citizens are allowed to convert USD 50,000 worth of renminbi per calendar year which means a lot of people are going to the exchange in January this year because they are betting that renminbi will depreciate, you will see massive capital outflow pressure this month specifically before it tapers off in February and March.
Sonia: The worry for countries like India is losing our competitive edge because of the way Chinese products are getting cheaper and getting dumped into the market like India. Would that pressure exacerbate you think?
A: I think that people manufacture in China not because of the cheapness of producing here and that's what I wrote in my first book 'End of Cheap China' a couple of years ago. People produce in China because of the ecosystem. It has far superior infrastructure than other countries like Sri Lanka or Cambodia. So industries has moved out or moving out of the country or Chinese manufacturing is moving up the value chain into auto parts and things like that. So I do not think renminbi is going to have a major shift. Exports are a bit constraint but the manufacturing in China is in for a rough time just because of weak export market globally and it's the main reason, it's just the weak global economy right now.
Latha: India is not competing with China in whole range of products. It's just the physiological impact that a chinese depreciation has across Asia. Will that be a major problem for investors across emerging markets Asia?
A: Sure definitely. You could have, not necessarily currency war, but you could see a lot of other nations having to depreciate their currencies. However, once you see China devalue, you are going to see warn on a lot of different currencies and people are going to put money into safer waters. The US dollar is going to do quite well out of this and investors should try to put money there. I also see continue weakness in gold, so people shift out of emerging markets currencies and shift out of gold and go to safer currencies like the US dollar.
Sonia: You briefly mentioned that the key worry right now is the way the global economies are slowing down and we have seen a contraction in not just the Chinese Purchasing Managers’ Index (PMI) but in the India PMI and the US manufacturing data as well. Which is the economy that you would be worried about the most hereon?
A: I am worried about China. It is going to be a real struggle in 2016 on the industrial side. The government doesn't have a lot of fire power to increase quantitative easing and there is only so much consumption to make up for weakness in manufacturing, but I am concerned about Saudi Arabia and Iran and tension in the Middle East and how that could spread out and cause even more of an influx. I would be cautious as an investor in 2016; it might be better to get into cash. It is going to be a rough 2016 for most investors.
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