Mark Williams

Untangling a web of rate cuts, tariff threats and renminbi retaliation

Mark Williams

Asia renminbi

The most significant events of the past week in Asia for investors are not the ones that have been grabbing the headlines. We believe the rate cuts in India, Thailand, New Zealand and the Philippines are – for now – more important than China’s currency devaluation and Donald Trump’s surprise imposition of new tariffs of 10% on a further US$300 billion of Chinese exports.

The backdrop to all these events was the US Federal Reserve’s rate cut at the end of last month – the first in over 10 years – which has triggered speculation over the impact of looser US policy on emerging market regions such as Asia.

Clearly all of these events are connected. What may be less obvious is that, despite the volume of news headlines devoted to China’s currency “manipulation”, this may turn out to be the least significant of this week’s events.

By letting the exchange rate drop to over seven renminbi to the dollar, we believe China was simply firing a warning shot over the US’s bows, showing that it is willing to do many things to address any sanctions that Donald Trump throws their way. Chinese authorities instantly said that they do not intend to enter into a competitive currency devaluation, and stabilised the currency to prove this, but I think they gave a clear message that their appetite for Donald Trump’s volatile tariff policy changes was waning.

For Trump’s part, his accusation that China is a “currency manipulator”, later endorsed by the US Treasury, does not stand up to any scrutiny. By the US’s own recommended definition, China is not a currency manipulator. Ironically, what seems to have really upset Trump was China allowing its currency to drift under market forces rather than manipulating it (by keeping it stable).

While the rate cuts in India, Thailand, New Zealand, and the Philippines can be rationalised as a typical reaction to a slowing global economy, the magnitude and timing of the cuts suggest currency competitiveness was also a driving force.

Asia’s smaller countries do not want to see their currencies continuing to strengthen compared to their biggest neighbour. The region’s currencies have generally appreciated against the renminbi, negatively affecting competitiveness – particularly for the less advanced manufacturing that these countries want to pick up.

Investor concerns over China’s actions have died down and the government seems to have contained matters by stabilising the currency, which markets have taken positively. However, the policy response from central banks in India, Thailand, New Zealand and the Philippines illustrates just how quickly global developments can ripple down to have a far-reaching impact on distant countries. Oscillations in the spat between China and the US are clearly buffeting other economies in the region in a very real way.

We are regularly updating our analysis of the tariff impact on all of our regional investments, not just those in China. So far, our focus on owning companies that provide both dividend and earnings growth has steered us clear of some of the most affected areas. Over the longer term, we believe the growth prospects of our companies will only be marginally diminished by the current trade tariffs, which means that a lot of these shares look very enticing at current valuations.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
Friday, August 9, 2019, 12:52 PM