The Chinese government surprised financial markets last week by devaluing the Chinese Yuan currency, allowing it to fall more than 3% against the US dollar.
Why devalue the Yuan currency?
The rationale behind the move is supposedly two-fold:
1. It is said that the Chinese government wants the International Monetary Fund (IMF) to include the Yuan in its Special Drawing Rights (SDR) basket. By allowing the free market to determine the value of the Yuan value, it is now one step closer in being included in the IMF’s SDR basket.
2. More analysts, though, are of the opinion that the devaluation is China’s way of addressing a slowing economy. The move supposedly confirms that China’s economic slowdown may be worse than expected and the government’s decision to devalue the currency is intended to boost the country’s exports.
Losers in the Chinese Yuan devaluation
Whatever the real reason is, it certainly impacted markets worldwide and ultimately created losers in the process. Among the sectors and industries expected to be negatively affected by the Yuan devaluation are:
1. Mining and Commodities
China is the world’s biggest consumer of commodities from oil to metals. With a slowdown in economic growth, demand for commodities is expected to slow down as well. Thus, mining companies and producers of commodities may consequently see a decline in revenues.
2. Emerging Markets and their Currencies
Russia and Brazil, two of the world’s biggest commodities exporters, could immediately feel the impact of China’s slowing demand for commodities.
In addition, emerging markets with high export exposure to China would also come under pressure. These countries include Hong Kong, Taiwan, Malaysia, Singapore and Korea. Fortunately for the Philippines, the country’s exposure to China is less than 4% of its Gross Domestic Product (GDP).
Emerging markets will surely retaliate in order to protect their currencies and their economies. Vietnam already counteracted the Chinese Yuan devaluation yesterday by allowing their currency, the Vietnamese Dong, to depreciate by 1% versus the U.S. dollar.
“Following the strong devaluation of the Chinese yuan, domestic market sentiment is very much concerned with the negative impact of a United States Federal Reserve interest rate increase,” Vietnam’s central bank said in a statement.
Expect other countries to allow their currencies to depreciate as well in response to the Yuan’s decline in value.
3. Exporters of high-end foreign brand to China
Chinese consumers are lavish consumers of high-end goods. But with a weakened Yuan, these foreign imports become more expensive which could lead to lower demand in China for such brands.
4. Gaming companies in Asia
In the past years, gaming resorts in Macau, the Philippines, and other Asian countries have primarily attracted mainland Chinese as customers. With a declining economy, Chinese citizens could reduce their foreign discretionary spending, including expenses in travel and amusement, leading to lower revenues for gaming companies.
PSE stocks affected by the Yuan devaluation
Given all these, which industry sectors and PSE stocks could be affected by the Yuan devaluation? A special report in the Philippines’ stock resource PinoyInvestor.com identified Mining and Gaming companies as primarily impacted by China’s move.
Six (6) specific PSE stocks were also regarded as highly vulnerable while eight (8) PSE stocks could be at risk due to a possible weakening of the Philippine Peso (PHP). A complete list of these stocks is available at the Premium Special Stock Report of PinoyInvestor.
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