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Just as world economies are gaining traction on growth, China exports deflation to it!

The Chinese PBOC caught the markets off guard yesterday morning, weakening its Renminbi trading band by 2% in an unscheduled, unexpected move. ‘Competitive easing’ followed as the SGD, TWD and KRW saw haircuts of 1-2%. Further out, the AUD/USD weakened as Australia, a large commodity and resource supplier to the Chinese economy, ‘adjusted’ indirectly. While the policy move yesterday is a departure from the more familiar interest rate cuts or RRR adjustments that PBOC has been using in the recent past, yesterday’s move to lower the currency band directly features yet another of the many tools the central bank has within its means to regulate monetary policies. This ‘direct’ move on the Renminbi could actually prove to be more effective in helping Chinese companies and industries especially those relying on exports. For certainty, this move will facilitate a direct boost to their global competitiveness and the encouragement can be felt more promptly here than the dilutive impact of a rate or RRR cut. On the other hand though, this move may also trigger a new currency war as a fresh round of ‘competitive easing’ by key central banks across, may follow PBOC’s move. Yesterday’s ‘first order’ reactions was weaker Asian and related currencies as suggested above. By early morning trade in European stock markets, luxury goods and exporters there including stocks of auto makers like BMW and VW all witnessed selling with falls of as much as 3% - this in spite of Chinese equities remaining somewhat flat (Shenzhen Comp +0.41%: Shanghai Comp -0.01%).

Chinese corporates vulnerable due to foreign denominated debt exposure

This overall calm in Chinese equities however, has failed to mask the collapse in Chinese Airline stocks. All three major listed airlines there saw stock prices slumping by more than 10%. China Southern was sold down 18% by the closed of trade yesterday. Key concern here besides an increased fuel bill due to the USD pricing element, is the concern over the companies relatively large foreign denominated debt.


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