China lowered in centre band once again for the 3rd day in this week to 1US$ : RMB6.401. For the past 3 days in succession, China had lowered its currency band 3 times. From RMB6.116 to RMB6.2289 to RMB6.3306 and to RMB6.401 today. So far, the devaluation is about 4.65%. It is too early to assess the over all impact although there can be some effect on the banks earnings and on companies that have exposure to the RMB.
However the impact of the stock market seemed to be more damaging causing the STI to retreat by 91.57 points (or about 2.9%) within a single day. While it is not sure if there will be further downward adjustments by the chinese central bank going forward, the timing and the speed of the controlled devaluation had made the market extremely jittery. The obvious reason that comes to our mind is that the chinese economy is doing badly and therefore she has to resort to lowering its currency band in order to maintain an econmic growth of 7% per year. By doing so, Chna is hoping to export its way out to achieve its target. Given that most of the countries have some exposure to this 2nd world largest economy, it is inevitable that all the Asian stock markets also tanked.
Objectively, short further downward adjustment by China, the overall percetage is still small, at about 4.65% compare to Japan’s 22% and Europe’s 16% against the US$.It is the timing and the speed of the adjustment that is causing fear in stock markets. Right now, many asian economies are not doing well and their currencies were also depreciating against the US$, a natural reaction to the impending US$ hike. A sudden change in the currency band would instill a lot of panic among investors. Going forward, hopefully China’s move does not provide excuses for other smaller asian economies to react causing more jitters in the already weak market.
Refer to market psychology in my book “Building Wealth together Through Stocks“.
(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.