Yesterday saw another devaluation of China's currency and markets have been hit; wealth managers and other commentators give their thoughts.

There are more than three months left to go before 2015 is over but already it looks as if this year might go down as the year of the Big Currency Move. The Swiss franc went into hyperspace in January against the euro, catching bankers and hedge funds off-guard; the Russian rouble has taken a hit; the euro is so weak as to be near par against the dollar and, most recently, the Chinese yuan, or renminbi, has been devalued by the country’s central bank. And the Asian giant may not be done yet in devaluing its currency.

The first move came on Tuesday, and markets were rattled again when the People's Bank of China set the yuan's midpoint rate weaker than the previous day’s closing market rate, which itself was down by around 2 per cent. The yuan's spot value fell yesterday when Chinese authorities issued July output and investment data; the currency has weakened by almost 4 per cent over 48 hours (source: Reuters). As a result of the devaluation, equity markets fell yesterday, as did certain commodity markets, including those for gold, while yields on certain government bonds also fell.

But is this shift a sign of an intensifying currency war, to use the colourful expression taken from a 2011 book by James Rickards, or are there more constructive ways to think about this shift? China, after all, has been opening its capital and financial markets in recent years and wants its currency to be a global reserve medium of exchange; on the other hand, sentiment has been hit by the recent sharp pullback in mainland China equity markets from their 12 June peak. Maybe the devaluation of the currency is part of the inevitable pain of a country seeking to become more in tune with an open market.

Here are some reactions from wealth management firms and other commentators about the renminbi devaluation and the wider implications for China, and the global economy. 

Any weakness in renminbi caused by this float should be bought, says Jan Dehn, head of research at Ashmore, the emerging market investment specialist. China’s currency is going to be one of the only reserve currencies not buoyed by QE [quantitative easing] and is likely to be the strongest currency in the world over the next decade, says Dehn.

China is also implementing more reforms than almost all the rest of the world combined and has massive consumption growth potential due to its high (49 per cent) savings rate. Real rates in local government bonds are nearly 160 basis points, which is among the highest in large countries, he said in a note.

He also argues that China is closer to having its renminbi included in the basket of currencies used by the International Monetary Fund to form Special Drawing Rights, a form of instrument used at times when financial liquidity is under strain. Commentators have said inclusion will boost the renminbi’s status as a global reserve currency.

“Closing the gap between the fixing and market-based valuations of the RMB is one of the key requirements for SDR inclusion. This action therefore takes China one step closer to SDR inclusion – set formally to happen this year with practical implementation starting around the time of the G20 summit to be held in China in November 2016 (where US president Obama will give his nod of approval as a final gesture before leaving office). SDR inclusion in turn is part of a much broader set of reforms,” Dehn said.

“Remember why China is implementing reforms, including liberalising its currency regime. The entire purpose of the reforms is to prepare the economy for RMB appreciation, i.e. a rise in the Yuan once quantitative easing across the Western world creates inflation and currency weakness in the QE countries. Inflation is likely to begin in late 2016 in the US as the drags on consumers’ willingness to respond to plentiful and cheap liquidity from household deleveraging, negative housing equity and unemployment ease,” he said.

“In the past few years, China has been hurt by its de facto peg with the dollar. The dollar is up nearly 40 per cent against its trading partners and other major currencies since 2011. The dollar rally has been fuelled by QE money and a perception originating as far back as 2011 (and yet to be realised) that the US is just about to have exit velocity and the Fed is just about to raise rates,” he continued.

“China still has a lot of work to do in order to get ready for RMB appreciation (and consumption-led growth), including implementing interest rate liberalisation, index inclusion, currency float, SDR inclusion, capital account liberalisation, development of the local government bond market, development of mutual funds, bank reforms, etc. Many of these reforms are still in the early stages,” he said.

“China has therefore wisely concluded that it makes sense to float now. Better to float now, experience weakness – if that is what the market wants – and then, when the tide turns and the QE currencies go down due to inflation, the RMB can go up hard and fast, but from a lower starting point,” Dehn concluded.

Nomura, the Japanese banking and investment house, said further falls in the Chinese currency will hit Japanese exporters.

“Recent Chinese economic statistics have suggested weaker corporate activity than market participants had been expecting, for example with an 8.3 per cent year-on-year decline in July exports and a 5.4 per cent fall in July producer prices, and investors may have been increasingly alarmed by the PBoC’s move in that it signalled that China’s economy was weak enough to warrant a currency devaluation,” it said in a note.

“Specifically, we see a bigger negative impact on export-related stocks, which have a competitive relationship with China, and on stocks with exposure to inbound tourism, from a devaluation of the yuan. Indeed, there was a rise in selling of Japanese stocks on 11 August on concerns that a weaker yuan would dent Japan’s export competitiveness vis-à-vis China,” Nomura continued.

“Corporate earnings have been strong in Japan, as we indicated in our 9 August 2015 Global Research report update on Q1 results at Japanese companies. While we see little risk of a major slide in Japanese share prices given strong fundamentals, we cannot rule out downward pressure in the near term from a devaluation of the yuan. On that basis, we think finding temporary refuge in domestic-demand stocks with little exposure to the Chinese stock market could be an effective strategy for investing in Japanese equities,” it said.

HSBC Global Asset Management said China’s devaluation of the currency highlights its desire to reform its forex regime as part of potential inclusion into the SDR system, and as an attempt to stabilise economic growth. There is, HSBC says, a risk of currency depreciation leading to more capital outflows although it expects the PBoC to take measures to stop a drain of liquidity.

“In the bond market, CNY depreciation expectations and the risk of more capital outflows in the near term could weigh on the CNH credit market, particularly if the CNY continues to depreciate versus the USD, leading to intensified concerns about capital outflows and tighter CNH liquidity,” the firm said.

“In the equity market, sectors that have high foreign-currency debt exposure, such as airlines, would be more negatively impacted. However, the market outlook will also likely depend on the macro, earnings and policy outlook as well as reform progress. If pro-growth policy efforts, including CNY depreciation, help stabilise China’s growth momentum, this could provide some support for the market, particularly if the depreciation is measured and moderate,” it said.

Brian Jackson, china economist, IHS Global Insight, a firm providing analysis for firms, said of the move: “This week's exchange rate policy change likely will ultimately be viewed as step towards greater market forces, including allowing the CNY to devalue when China’s economy worsens in aggregate.

“While the design of that policy change is surely motivated by China’s desire to enter the IMF’s Special Drawing Rights, the timing is just as surely motivated again by the desire to reduce excess volatility (especially on the downside), this time for the export sector. Despite the government’s efforts, which are partly restrained by its own excesses of the past stimulus cycle, growth will continue to slow in the second half and for several years beyond, until the new economy is sufficiently large to counterbalance slowing elsewhere,” Jackson said.