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Chinese Yuan To Devalue By At Least 10%?
By: Dr Chan Yan Chong
Articles (200) Profile

When I attended an investment seminar in Singapore on 12 September, it was interesting that most of the audience’s questions revolved around the Chinese stock market and the Chinese yuan.

Coincidentally, the seminar was held the day after Singapore’s general election, of which the results varied widely from pre-election media coverage and predictions. In the absence of Lee Kuan Yew, the People’s Action Party’s vote has gone up to 70 percent from the 60 percent in the 2011 election. Since the last election, the Singapore government has made some major adjustments to its policies – the influx of foreign workers and talents have been curtailed, while welfare for the grassroots has been beefed up.

Perhaps voters thought that if opposition votes continue to increase, the government would lean further towards caring for the grassroots, but where would the money to subsidise them come from? Therefore, this election’s results may prompt the PAP government to rethink its foreign labour policies over the past four years, which have already hurt Singapore’s economic competitiveness.

The US stock market rose in anticipation of the Federal Reserve raising interest rates at its latest meeting, even as Wall Street’s big-wigs were betting on the Fed not raising rates. As it turned out, the Fed did not raise rates at its meeting on 17 September. US stocks fell on that day and continued falling the next day, as some investors took advantage of the news to liquidate their positions even as others were still apprehensive about the looming rate hike.

According to the Fed chairwoman Janet Yellen though, there is still a possibility of a rate hike in October.

One of the probable reasons why the Fed did not raise rates may be the recent appeal from the International Monetary Fund (IMF) and the World Bank for it not to do so. The strongest impetus for the US to raise interest rates is to “save face”, as the talks of a rate hike have been going on for more than two years. On the other hand, the strongest reason for the US not to raise interest rates is its negative impact on the US economy. The dollar is already too strong, and a rate hike will cause the greenback to strengthen further, which might likely erode away the US’ competitiveness, cause a currency war and trigger a global financial crisis.

Despite the sharp fall in the US stock market after the Fed’s inaction, sentiments in the US, China and Hong Kong stock markets are markedly more optimistic than that before the Fed meeting. With anxieties over a rate hike dissipating, Hong Kong’s property stocks, which are particularly sensitive to interest rate fluctuations, staged a significant rebound. Although the rebound in property stocks began even before Fed’s meeting, it shows that investors’ sentiments are no longer as pessimistic.

In the recent months, the Chinese government had been busy, pricking the stock market bubble at one moment and then suddenly devaluing the yuan (which had risen for 10 years straight) at another. After the stock market bubble was burst, it went into a panic-driven plunge and the Chinese government had to scramble to bail out the market. The panic triggered by the devaluation of the yuan was significant too, which was why China’s foreign exchange reserves fell substantially in August, as many people rushed to convert yuan into Hong Kong dollar or US dollar.

Despite much chaos caused, the magnitude of the devaluation was only three percent. This three percent depreciation does not have any real impact on the economy, and the mainstream view is that the yuan still has some room for more devaluation. The general belief is that the yuan needs to devalue by at least 10 percent for it to stimulate economic development and increase China’s export competitiveness.

Expectations for another round of devaluation of the yuan remain strong, leading the Chinese government to strengthen its currency exchange control, so as to restrict the outflow of private capital. Premier Li Keqiang said that the yuan does not have the conditions for a long-term depreciation, but it is still not easy to alleviate the panic caused by a short-term downward correction. Thus, the only viable approach is direct intervention, which includes foreign exchange controls and direct intervention of currency rates.

I believe the Chinese government will still be intervening in the currency market in the short term so as to stabilise the yuan exchange rate. The Chinese government needs to rebuild confidence in its currency and fortunately, it has a foreign exchange reserve that is strong enough to ward off possibly any malicious attacks on its currency.

Some months back, Li Ka-shing announced the merger of Cheung Kong Holdings and Hutchison Whampoa. After the announcement, the share price of Hutchison Whampoa rose higher than the merger swap ratio that Li announced and rumours claimed that major fund houses were snapping up the shares, so that they can have a bigger bargaining chip against Li to negotiate for a higher swap ratio for Hutchison Whampoa shares. The tactic failed eventually, as the merger went ahead successfully, with the swap ratio unchanged. On the eve of the shareholders’ meeting, share prices of both Cheung Kong and Hutchison Whampoa rose sharply, causing investors to worry that share prices would plunge if the merger failed. Thus, even though the swap ratio was not ideal, retail investors and fund houses had no choice but to vote in favour of the merger.

Recently, Victor Li also announced the merger of Cheung Kong Infrastructure (CKI) Holdings (1038) and Power Assets Holdings (0006), with 1 Power Asset share swapping for 1.04 CKI shares. Share price of both companies rose after the announcement and exceeded the proposed 1.04 swap ratio. Again, fund houses stepped in to demand CKI to raise the swap ratio. At the same time, many people, especially shareholders of Power Assets, riled against Li Ka-shing and Victor Li, accusing them for manipulating the share price of CKI such that its rise far outpaced that of Power Assets’, in preparation for the merger.

In recent months, Power Assets stock prices went into correction while CKI remained stable, so the investors of Power Assets have indeed been shortchanged. With the proposed merger, history looks set to repeat itself. The easiest way to get minority shareholders of Power Assets to vote in favour of the merger is to boost the share prices of both CKI and Power Assets before the shareholders’ meeting.

Investors need to remember that any merger and acquisition will always benefit major shareholders, if not it would not have happened at all. Therefore, when investing in companies with parent companies or subsidiaries, investors must choose wisely.

Still worried about when and how much would the US Federal Reserve hike interest rates? Do you have burning questions that you want to ask regarding the China economic slowdown and SHCOMP nosedive in June? Are you confused if any of the external factors from other countries in Asia will affect your Singapore stocks portfolio?

Catch renowned investors and speakers with rich experience in the stock markets, who have had witnessed multiple stock market crashes and global recessions over the years at Shares Investment Conference 2015!

Speaker profiles

1. Dr Chan Yan Chong, a renowned investor with more than 25 years of experience and the MBA programme director & associate professor of business school at the City University of Hong Kong.

2. Kevin Gin (CFA), the Founder and Principal of Alpha Capital. He was the former COO for CITIC Securities, Head of Singapore and Regional Real Estate Research for Kleinwort Benson Securities Asia (now part of Credit Suisse) and Head of Greater China Property Research with Yuanta Securities (Hong Kong)

3. Louis Wong, one of the most experienced fund managers in Hong Kong. He has over 25-years of solid experience and track record in the financial market. He was awarded Best Financial Analyst for 3 years by the Putonghua Channel of Radio Television Hong Kong and is also a part-time instructor of several investment courses in various Hong Kong universities.

4. Daniel Loh, an investment coach that specialises in equities and derivatives trading, he appears regularly on local TV financial programmes like “Good morning Singapore” and “Hello Singapore”.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

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