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By Clive Hale

Chinese devaluation – what next?

The “one-off” devaluation of yesterday was never going to be such an animal and we “eagerly” anticipate a “three-peat” tomorrow.

Ever since Deng Xiaoping turned the Maoist revolution on its head, China has relied on continuous economic growth to keep the Party, the Army and, not least of all, the people, happy. In Western economies we have “got used to” contractions, but not so in the Middle Kingdom.

With most of the world in a “race to the bottom” as far as their currencies are concerned, China had no option but to let the yuan adjust downwards to restore their export competitiveness and make it cheaper to buy locally-produced goods rather than imports. We all remember the slogan “Buy British” and we are about to hear a resounding siren call to “Buy Chinese”.

Companies and countries exporting to China will therefore see orders contract as their products will be less competitive and there will be less demand as local sources are substituted. It is already happening. Cisco just aren’t selling as many servers and routers and the XiaoMI phone now sells more units in China than Apple sell iPhones there.

Asian and emerging market countries are already finding their currencies under pressure with new lows against the dollar for Brazil, Russia, Indonesia, Singapore and Thailand. The Hong Kong dollar peg is almost certainly the next “managed” currency to be set adrift. We have seen this before in the Asian currency crisis of 1997 and this is what happened to the markets then. We may be due a repeat.

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Clive Hale – Director – August 1st 2015

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