China’s devaluation may spark another currency crises and Asian stock market fallout

China made a surprise move to devalue its chinese yuan to US dollars. The mid-point range is now RMB6.230 instead of RMB6.116, a decrease of approximately 1.8%. This would have indicated that the chinese economy is not doing as well and the chinese authority is trying to devalue the yuan to export itself out of the crisis. Certainly, it will create a round of currency war among the asian currencies, which are already very weak. The Malaysian ringgit and Indonesian rupiah are at their 17 year low since the Asian financial crisis in 1998. In fact, Malaysian ringgit had gone below the peg of US$:MYR3.80 during the Asian financial crisis. It has been trading around US$1:$3.94 recently.

Certainly, with the move to devalue the chinese yuan against the US$, it is not going to auger well for the stock markets. We use the lesson  from the Asian financial crisis as a guide. it started off from the currency crisis, of which Thailand was vigorously trying to defend its baht pegged to US$. When Thailand had deplected its foreign reserve, it had to let go of its peg resulting in a free-fall of the baht. This then spread to the other asian countries as most of them were pegged to the US$ at that time. One-by-one, indonesia began to fall and followed by South Korea and they end up seeking financial aid from IMF. Although many other asian countries, such as Philippines, Malaysia, Taiwan, Hong Kong and Singapore, did not enlist the help of IMF, their currencies were also badly battered.  At that time, China was still in the midst of economic development and its stock market was then quite insulated from the outside world. Now that China as the world’s second largest economy triggered the devaluation, it may spread to other smaller asian economies. Although all economies except China and Hong Kong were no longer pegged to the US$, they are still generally weak. So sit tight, It is not too far-fetch to expect a 30-40% drop in the Straits Times index (STI) going forward even though it has already been more than 10% down from its recent high.

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.

 

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