Emerging Markets Find Relief in China's Firm Stance on Yuan

23 Aug, 2023

Emerging Markets Find Relief in China's Firm Stance on Yuan

China's heightened resolve in shoring up its markets has brought a welcome sense of relief to assets in developing nations, which were grappling with apprehensions about the world's second-largest economic player.

After enduring a nine-day stretch of losses that commenced in the prior April, equities in emerging markets saw a resurgence. Chinese stocks experienced a surge in late Asian trading, shortly following Beijing's reinforced safeguarding of its currency. This development provided a boost to confidence in other higher-risk assets.

Currencies like the South African rand and the South Korean won, which had been adversely impacted by recent drops in the yuan, spearheaded the rally on Tuesday.

Nevertheless, the duration of this respite remains uncertain. Analysts propose that China's efforts to stabilize the yuan are insufficient to counter its devaluation, as the absence of substantial initiatives to stimulate consumer spending and the ongoing crisis in the property sector continues to erode investor faith.

Aspects such as concerns surrounding China's economic deceleration and expectations of prolonged elevated interest rates by the US Federal Reserve have contributed to the most significant August downturn in years for emerging markets.

Piotr Matys, a currency analyst at InTouch Capital Markets in London, was quoted by Bloomberg saying, "The recovery in Chinese stocks offers some relief to emerging markets. However, tangible actions from Beijing are required to address fundamental concerns in the Chinese economy, which remain a major source of worry for investors aiming for enduring enhancement in risk appetite."

China has introduced measures to curtail offshore funding, resulting in heightened costs for speculators seeking to bet against the yuan. Furthermore, the country established a new record for the currency's reference rate, surpassing initial forecasts.

On Tuesday, the People's Bank of China fixed the daily exchange rate at 7.1992 per dollar, notably below the Bloomberg survey's average of 7.3103. This marked the most substantial deviation since the initiation of polling in 2018.

Additionally, while certain traders attribute the abrupt surge in Chinese equities to technical factors and a dearth of fresh catalysts, talks regarding state-backed fund acquisitions have also been prevalent.

Moreover, the BRICS meeting commenced in Johannesburg on Tuesday, centering on diminishing reliance on the US dollar. Beyond summit-related developments, investors are eagerly awaiting insights into the global interest rate trajectory from central bankers at their annual gathering in Jackson Hole, Wyoming, later this week. The pinnacle of the event will be Federal Reserve Chairman Jerome Powell's address on Friday.