Opinion
The next currency wars phase could be close
Philip BakerAssociate EditorIf Vimal Gor is right, investors should prepare for the next instalment in the currency wars: a move by the Bank of Japan to lower the yen.
The head of income and fixed interest at BT Investment Management, Gor believes the move by the People's Bank of China this week, to devalue its currency, is a sign authorities are losing control of the country's growth rate to such an extent that they were forced to do something about it.
"A lot of people are writing about this as being part of the SDR inclusion story. I think they are missing the point. China is losing control of its growth and they need to do this to try and improve its environment," he said.
BT fund manager Vimal Gor Christopher Pearce
Many analysts thought the move by the Chinese central bank this week was part of a broader plan to get the yuan into the International Monetary Fund's reserve assets known as special drawing rights.
But Gor thinks otherwise and said the move is a "massive deflationary force for the world" which implies investors should buy bonds as yields will fall.
It's also good for the US dollar, very bearish for the euro and all Asian currencies.
"I wouldn't be surprised to see the Bank of Japan react to this soon as the currency wars continue," he said.
Gor also highlighted the amount of money flowing out of China over the past few months which "has the effect of tightening monetary policy domestically".
Then there is the rise of the US dollar over the past year that has swept the yuan along with it, making the yuan an overvalued currency.
"Not only do the PBoC and the broader leadership have to worry about growth concerns, but now there is an effect that is tightening policy, working against them," Gor said.
The last thing Australian resource companies and global commodities markets needed was bad news from China and concerns their 7 per cent target growth rate won't be achieved.
Devaluing the yuan and not using any of the old, tried and trusted measures to get the economy going has also worried investors like Gor.
"China has traditionally responded to economic weakness with interest rate cuts, reserve requirement ratio cuts, or announcements of stimulus.
"These more recently have been notably absent, either indicating a lack of faith in these measures or that they are being saved for something far more serious," he said.
In the wake of all the selling in financial markets this week, the PBoC tried to calm financial markets and in a statement said there was no need for China to start a currency war with other countries to gain a competitive advantage.
On Thursday the deputy governor Yi Gang said talk the Chinese central bank wanted to devalue the yuan by 10 per cent to boost exports, was "totally groundless".
The $A moved back towards US73.80¢ after breaching US72¢ the day before while the sharemarket also rebounded.
As the Chinese central bank said earlier this week, if every country tries to devalue their currency to try and win, then no one really benefits.
That includes Chinese companies that have more than $US1 trillion of US denominated debt, which will now cost them a lot more to service.
But when China moves like it did this week it leads to a lot of unintended consequences.
It also comes as investors are edgy about the length of the bull market on Wall Street and the Federal Reserve's first rate rise in years.
But one very deliberate outcome from a lower yuan, it is makes Chinese products around the globe a whole lot cheaper. In the end the Chinese economy, which probably isn't as strong as investors think, should get a boost from additional exports following the fall in the yuan.
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