China Slide Endures After Yuan Revaluation

Market Trends - 11/01/2016

The Chinese stock market overnight continued its bearish momentum lower, having plummeted during the opening of the cash equity session. The selloff has mainly been attributed to the state of the Chinese economy, which for many years was considered a locomotive for global growth. Among growing evidence of a slowdown is the serious concern surrounding a magnified currency war, especially after the rapid devaluation of the Chinese Yuan. The Chinese market commenced with a further decline in the latest weekly reopening, with the China CSI 300 collapsing -5.03% during today’s trading session, even after the People’s Bank of China revalued the Yuan higher. Chinese Premier Li Keqiang stepped up the defensive rhetoric once more, stating that the Central Bank will not add massive stimulus or flood the economy with investment in order to grow domestic demand. This underlines policymakers’ increasing view towards external development like the Silk Road initiative which are likely to see returns on infrastructure investment funds go further when compared to the domestic impact.

The ripple effect of China catching cold is felt globally as evidenced by the growing interconnectedness of global trade and capital markets.  The idea of the butterfly effect is acutely sensed across major global financial markets irrespective of their dependence on China for trade.  The domino effect on stocks has been clearly visible with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite continuing to decline in a move echoed by major European benchmarks including the German DAX 30 and French CAC 40. Other Asian economies are also sensitive to the developments in China, mirroring the declines in local indices.  The most pronounced impact is manifest in metals with copper in particular falling below the critical $2.00 level. Existing Chinese fundamentals further complicate the situation for investors, especially with the PBOC forecast to slash interest rates even further amid speculation that the required reserve ratio may also be used to lift financial stability.

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