Oops, They did it again: China’s central bank devalued the yuan on Wednesday for the second day in a row drastically, although on Tuesday was still talk of a single step. This time, the bank put the average exchange rate against the dollar 1.6 percent lower than the previous day fixed. And now more and more observers are afraid that this initiates a sustained downward trend.
This will have significant consequences, especially for the German economy and the financial markets. The latter took this on Wednesday already anticipated. The German stock index (DAX) broke again by more than two percent, fell at times even back below the mark of 11,000 points – since Monday he has thus lost around 600 meters. This could go on like this, when the devaluation of the Chinese currency to continue.
It is highly probable. “There are strong indications that has quite a devaluation pressure built up lately when Yuan,” said John J. Hardy, chief currency strategist at Saxo Bank. This shows, for example, that for months tens of billions of dollars have been withdrawn on capital from China. Now that the Fed has opened the valve, the downward pressure appears to discharge.
Yuan will continue to fall
How far this can still go is unclear. Analyses are based on an overvaluation of the yuan by up to 13 percent. The experts at Société Générale therefore expect for example a drop in the yuan up to 6.80 yuan per dollar, from the current 6.35 yuan. However, such calculations and forecasts are always treated with caution. For trends in the financial market shoot usually far beyond such theoretical values also.
The fact that this is now also possible for the Chinese Yuan, it has China’s central bank on Tuesday set the course. Because along with the devaluation, it introduced a new exchange rate mechanism. Until then, the market price of the currency could fluctuate daily two per cent up or down, starting from the respective average exchange rate. This, however, put the central bank firmly totally free – even if the market price was therefore the day before fell by two per cent, it could be the middle rate unchanged. And that’s what she did, so that the rate hardly changed despite the downward pressure increased.
Now, however, should be the middle rate based on the market price of the previous day. So it dip, and the mean rate of the following day will be lower, and so the course can give in slow but steady steps ever. So, as has happened promptly on Wednesday.
Forecasts for China’s economy are bad
And the economic data suggest a persistent devaluation trend. Because China’s exports have recently plummeted, industrial production and investments grew far less than expected. “There is no convincing reason why the yuan should recover, the economic data and the speculative pressure rather suggest continued weakness”, therefore also says Jason Daw by Société Générale.
This has consequences. “This is clearly a negative for companies that export to China,” explains Andrew Garth Waite, chief strategist at investment bank Credit Suisse, the reaction. Because their products are more expensive with a sinking Yuan price for Chinese importers. And for Europe’s exporters just adds that now At length the same time the euro against the dollar again – compared to the yuan the euro exchange rate therefore rises so the more
Most of the German firms are affected in Europe, of course. Because in any euro area country, China’s share of exports is higher than in this country. Nearly seven percent of all German exports now go there. In absolute terms, the importance is even more impressive: Ten years ago, it exported goods worth around 21 billion euros to the Middle Kingdom, last year this figure was already 74.5 billion euros.
German companies are heavily affected
So China is now for about seven percent of all sales of German companies. Many companies, however, the proportion is still much higher. Volkswagen makes almost 40 percent of the business there, at BMW figure is still 22 per cent. And not much different it looks at other major corporations such as Daimler, Wacker Chemie or Infineon.
In the corporations themselves are you currently still allowed. Whether the sales figures will deteriorate due to the devaluation, one can only say, if the figures for August vorlägen, says BMW. In addition, the company safe against fluctuations in the major currencies, including the yuan heard from.
Also, Siemens CEO Joe Kaeser said in an interview to the US television network CNBC that he was not worried. “It is important not to panic.” Siemens had to analyze the effects unhurriedly. However,
Financial markets speak a completely different language. The share of BMW slumped by nearly eight percent since Monday. Similarly looked the reductions at Volkswagen and Daimler. Apparently expect investors with far greater impact than the company currently willing to admit.
Hope on measures for the economy
But not only the exporters suffer. “A weaker yuan is negative even for those companies that are in competition with Chinese companies,” says Andrew Garthwaite. For this he is one of Germany for example, BASF and Lanxess. However, many companies in the field of renewable energies, especially the solar industry should come under more pressure when Chinese competitors can offer their products cheaper.
Experts hope that Beijing’s devaluation of its currency complemented by additional measures that stimulate the economy, which then would have a total positive consequences also for German exporters again. Or the central bank intervenes again by throwing some of their dollar reserves onto the market and thus supported the Yuan. With around 3,600 billion in foreign exchange reserves, they would in any case the power to do so.
Employees: Philipp Vetter
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