Tag Archives: Asia

China: What’s next?

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It is all started when China had released its exports numbers on August, 7th.

Chinese exports were tumbled by 8.3% in July and China was registering its worst export decline in the last four months.

Most importantly, the market was not expecting these figures to be that bad!

Along with the release of the figures, Chinese central bank (People’s Bank of China) published a report warning of further economic weakness.

The following week, People’s Bank of China shocked the market by changing the way the yuan’s trading band is calculated. This led to 1.9% depreciation in the first day (August, 11th).

When yuan opened down a further 1.6% on Wednesday (August, 12th) and then rose 1% at the end of the same day trading. Another fall in the following day’s opening was quickly intervened by People’s Bank of China. (August, 13th)

The week between August, 10th and August, 17th, the global markets had shaken up substantially all across the board.

European equity markets were almost down 5%, commodities had fallen through the roof and volatility picked up dramatically.

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History repeats itself?: On 1 January 1994, China announced a reformed system of foreign exchange and devalued yuan to 8.7 to the dollar. This move had happened after a series of six devaluations over ten years and by 1993, the yuan was trading 5.32 to the dollar.

As a result of this action, U.S labelled China as a “currency manipulator.”

So Why China is doing this again? 

  • China has an ambition to include the yuan in the select group of currencies that IMF uses to calculate the SDR, its unit of account. Inclusion to basket of SDR means yuan to become a global reserve currency. To achieve this, China needs to allow free float of its currency and by allowing market makers to submit prices for the reference rate based on the previous day’s closing spot rate is one way.
    – By the way, IMF “cautiously” welcomed this move!
  • More importantly, strong yuan makes Chinese goods less competitive!It is not a secret that China will not grow over 7% from now on and its export oriented economy becomes less competitive with strong yuan.
    In fact, the recent IMF report forecasts 6.8% GDP growth in 2015 and 6.3% in 2016.

The real question to ask is whether China would allow depreciation of their currency if its GDP growth would not falter and export growth was in place.

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What shall we expect going forward? 

I expect a lot more of volatility ahead for all markets for the rest of the year.

According to the Economist, the devaluation only undid the previous ten days’ worth of appreciation in trade-weighted terms. The yuan remains more than 10% stronger against the currencies of China’s trading partners than it was a year ago.

It is very likely that we will see a continuation of gradual depreciation of yuan which is unlikely to help the slowing Chinese GDP and its exports.

The spill over effect has already felt quite substantially on commodity prices along with commodity export oriented economies such as Australia and Indonesia. This pressure is very likely to remain for the rest of the year.

As many economists call it as a “currency war”, we will continue to see “at all time lows or highs” in many pairs.

A very possible FED interest hike in September will make things even more complicated.

Finally, I believe yuan will be added to basket of SDR in a relatively short period of time. Otherwise IMF may become irrelevant.

Book recommendation: The author of Currency Wars and Death Of Money, James Rickards, has been talking about the ongoing play for sometime now. Some quotes from his book “Currency Wars” are as per below.

“The U.S view that everyone -Europe, North America and Latin America -would gain exports and growth if China revalued the yuan and increased domestic consumption.” 

“The stimulus spending would increase the deficit and waste valuable resources, but not do much else.”

“As of April 2011, the FED had a net worth of approximately $60 billion and assets approaching $3 trillion. If the FED’s assets declined in value by 2 percent, a fairly small event in the volatile markets, the 2 percent decline applied to $3 trillion in assets produces a $60 billion loss – enough to wipe out FED’s capital. The FED would then be insolvent. Could this happen? It has happened already, but the FED does not report it because it is not required to revalue its assets to market value.”

“From its creation in 1913, the most important FED mandate has been to maintain the purchasing power of the dollar; however, since 1913 the dollar has lost over 95 percent of its value.” 

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Best from Singapore,
Sukru Haskan
Twitter: @sukru_haskan

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Happy 50th Birthday Singapore!

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Singapore became independent on 9 August 1965 and this year marks its 50th birthday. There are many events happening all along this tiny cute island to celebrate its well deserved 50th birthday this week.

I have been living in Singapore slightly over 2 years now and I should say that I feel really privileged to live in this country. Having lived in Turkey, United Kingdom and Switzerland (for a short period of time), Singapore is really unique in many ways.

Imagine a country which was established only 50 years ago and it ranks at the top of the tables for many important aspects of the life such as education, health system, ease of doing business, etc.

To be honest with you – I was not aware of many of these positive attributes of Singapore before coming and living here. (I should say it was a nice surprise to find out!)

Singapore is a small country with 5.3 million habitants. The population is quite diverse with primarily Chinese, Malay and Indian ethnicities and its first official language is English.

Singapore is only 714.3 square km but it attracted almost USD 850 billion foreign direct investment whilst USD 500 billion of Singapore’s investments is invested abroad. Its sovereign wealth funds, Temasek and GIC, are the vehicles to invest abroad. It should not be a big surprise why Singapore tops the list of ease of doing business!

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According to OECD global education report, Singapore is number 1 in education. Same report puts Sweden number 35, United Kingdom number 20 and United States number 28! You may be wondering who is the 2nd and 3rd; they are Hong Kong and South Korea respectively! No wonder why this millennium is Asia’s time!

Singapore healthcare system is ranked 1st in the world by Bloomberg in 2014. Of course, it comes at a cost! If you are brave enough not to have a private insurance in Singapore, you are definitely pushing your luck.

Singapore is one of the least corrupt countries on earth. According to Transparency International, it ranks 7th out of 175 countries in 2014. Same report ranks Turkey 64th, UK 14th and Switzerland 5th.

Singapore is running constant current account surplus (21.3% of the GDP 2015) and it has a very low level of unemployment. World Happiness Report ranks Singapore 24th in 2015.

Statistics are important but nothing can be more important than the people. Singapore is full of hard-working, intellectual and warm people.

Lee Kuan Yew, the founding father of Singapore, will be remembered for generations to come not only by Singaporeans but also by the world. He proved the humanity a leader with the right skills, can build a country from scratch up to a very high level.

I strongly suggest you to come and visit this beautiful country!

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It is a very nice coincidence that my first blog post happened to be an article on Singapore. Through this blog, I am planning to be writing on economics, politics, finance, life style, history and travel.

I will be updating my blog regularly every Saturday and you can follow me on twitter (@sukru_haskan).

Best from beautiful Singapore!
Sukru Haskan
Twitter: @sukru_haskan

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