Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 546

Is a large Chinese renminbi devaluation coming?

This is an edited transcript of comments from Andrew Swan, Man GLG’s Head of Asia ex-Japan Equities, at a media briefing hosted by Firstlinks’ sponsor GSFM.

What's striking about Asia at the moment is that for most of my career, it has been very synchronous with global growth. And in the last 12 to 24 months, we've seen very asynchronous growth in Asia, to the rest of the world and also within Asia itself. I think a lot of that has to do with the lingering effects of COVID and how that affected the world differently … and the inflation pressure that emerged in the West which didn't emerge in Asia.

Bright outlooks for South and North Asia

[There are] three buckets in Asia at the moment. There are domestic demand economies, which are most of Southeast Asia or South Asia, including India, Indonesia, and the Philippines, and Thailand. The real story here is: growth is good. More domestic demand driven rates are fairly high in these markets because of what the Fed has been up to. And, really looking for a green light from the Fed to cut rates. So, what is already a good environment here can actually get better, and the growth cycle can elongate as rates come down.

The second bucket is more the global demand North Asian economies. And while demand is slowing down, there is this thing called AI that will supercharge the tech cycle, and Asia is a big beneficiary of that, particularly within semiconductors. But even further downstream, that's what's going to be interesting. This year, most of the AI euphoria has been in upstream, in semiconductors and the cloud. And now we're just on the cusp of seeing how that stimulates demand downstream.

So, you're going to see a lot more AI related functions in your phones and your iPads, in your laptops and in your PCs. And when you see this step changing technology, you tend to see a lot of innovation that drives demand after what has been a fairly weak demand environment for consumer electronic products. I think you're on the verge of a new cycle.

The outlook for those economies and companies in the region which are exposed to the tech cycle, I think looks very good.

China’s economic model is dead

Then there's the big bogey in the room being China. What has surprised us is how quickly China has moved into a deflationary environment and even idiosyncratic opportunities within the economy have been swamped by this deflationary force that's emerging.

Now, my view on China - it's at the end of the cycle. It's been led by investment and debt, and it has to change. The problem with change and structural changes - normally there's pain involved. And normally, policymakers will do nothing until they have to. I guess we're getting closer to that point where they're going to have to do something because the pressure on the domestic economy and the equity market is going to force their hand at some point.

What has been surprising is the resilience of the currency in the scheme of what's going on in deflationary environment. I do think the China has accumulated a lot of FX (foreign exchange) reserves offshore in the banking sector, not so much with the PBOC (People's Bank of China). But certainly the state-owned banks have held a lot of FX reserves, and if you look at FX reserves in the PBOC, they haven't really changed despite these deflationary forces. I think that's because these hidden reserves are being used to support the economy, but that only lasts so long. China is in this situation where they really need the currency to depreciate to make the economy more competitive.


Source: Yahoo Finance

They’re running very high real interest rates, which supports the economy the currency in the short term but puts pressure on the economy over the medium term.

China has two main options

There are two options here for China, which are structural in nature:

  • a one-off devaluation of the currency; a large devaluation of the currency. Now, certainly the policymakers are not suggesting anything like that. But the reality is, if you're going to devalue your currency, you do it from a position of strength, not weakness. There is very much school of thought that China may do a one-off devaluation to get ahead of these problems.
  • the second option for China around structural reform is the savings rate is extremely high and consumption is very low. How do you break that? I think a lot of this has to do with the social safety net, which is broken. The hukou system needs to change. The comments coming out of Xi Jinping in recent weeks and months have started to include social welfare reform, which needs to be watched very closely. Anything that can give people confidence - that there's something there for a rainy day - will lead them to consume more. And that's really what China needs.

Overall, the market is getting a little bit too bearish about China. There are definitely some challenges, but there is still opportunity. When you get these periods of dramatic sell off, that's when policymakers normally are forced to respond. And we haven't seen it yet but we're getting closer.

The final point is the fiscal deficit in China contracted a lot last year because they [policymakers] felt the economy would recover quite strongly. There's definitely scope on the fiscal front for China to do more this year in the face of weakness.

 

Andrew Swan is Head of Asia ex-Japan Equities at Man GLG, a fund manager partner of GSFM, a Firstlinks sponsor. The information included in this article is provided for informational purposes only.

For more articles and papers from GSFM and partners, click here.

 

4 Comments
Dudley
February 08, 2024

Banking Crisis: Woman Calls Police to Withdraw $600; Millions in Savings Become 10¢ in 4 Months
https://www.youtube.com/watch?v=89V7nJJ-c_Y

Jason
February 13, 2024

China is uninvestable.

Their shadow banking is opaque. Their local governments have lots of unsustainable debt and funding as they relied on land sales to fund their budgets. They won't be doing a massive building program as they have overbuilt, so much less land sales going forward which put their budgets and debt repayments into question. This means less spending.

They then have a book for the tax man and auditors, a book for internal investors, and a book for external investors. Along with the risks of capital control and negative population growth, good luck trying to invest in China for the long term.

Dudley
February 14, 2024

"China is uninvestable":

... until a blood has been shed in the streets and flushed down the gutters by several monsoons and the green shoots reappear.

 

Leave a Comment:

RELATED ARTICLES

Will the Year of the Dragon be good for markets?

Three themes and companies to play China's rise

Is China’s regulatory reform stifling ‘animal spirits’?

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.