Many foreign investors used to have strong confidence in the strength of the renminbi, which is why they made a profit investing in renminbi and dim sum bonds.
Now, they’re rushing to change renminbi into US dollars or other currencies for fear of another “one-off” adjustment.
Many mainland investors face limited investment choices and restrictions on foreign exchange.
A billionaire friend is fretting about the yuan devaluation.
I thought a weaker currency would bring life to his manufacturing business which has been losing competitiveness due to high cost and a strong currency.
He was unprepared for the sudden yet moderate yuan devaluation.
Meanwhile, he knew that his competitors in other countries benefited from a 20 to 30 percent depreciation in their own currencies.
A modest yuan devaluation is little help for the nation’s manufacturing sector.
The billionaire’s family and relatives have suffered from the weaker currency.
His investment in A shares has seen huge losses as foreign investors have dumped China stocks after the devaluation.
There is close correlation between the renminbi and A shares.
Historically, the equity market fell during a currency depreciation.
A weak currency triggers re-rating of renminbi-denominated assets and hurts the financial and property sectors, weighing on the broader market.
Also, expectations for yuan devaluation lead to outflows of hot money, resulting in tighter liquidity in A shares.
The billionaire hedged his export business using foreign currency settlement and kept his renminbi investments in the hope of a rally in the redback.
In theory, a weaker currency benefits smaller exporters that settle immediately.
However, it’s little help for big exporters who usually lock in the exchange rate with banks.
But the billionaire can bear some loss from those yuan-settled exports.
Also, he has a property investment portfolio worth several billion yuan. The yuan depreciation will weigh on that portfolio.
The renminbi has strengthened against the US dollar in the past decade, attracting massive US dollar assets to the China market, much of which has been invested in property.
These investors have enjoyed sharp appreciation in their assets.
However, the devaluation prompted them to dump their property investment, triggering a fall in property prices.
The billionaire’s wife used to go on shopping sprees overseas but the weaker yuan has increased the cost of these travels in US dollar regions including Hong Kong.
He is also arranging for children’s education overseas, meaning the yuan devaluation will add up to higher costs.
Many parents have been exchanging renminbi for the US dollar for fear of further depreciation.
The billionaire’s eldest son has started an online shopping business while studying.
However, the weaker yuan could squeeze his profits or even lead to losses as a result of a narrower price gap.
A number of Chinese companies have chosen renminbi to settle foreign trade in light of steady gains in the redback.
Some companies even bought money to bet on yuan appreciation.
Many of these companies, including Hong Kong-listed firms, and high net-worth individuals, suffered heavy losses after the devaluation.
This article appeared in the Hong Kong Economic Journal on Aug. 24.
Translation by Julie Zhu
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