The movement of the Chinese renminbi has a direct impact on the Hong Kong market, given that a large number of Hong Kong-listed Chinese firms derive most of their revenue in yuan.
A weaker yuan will have negative impact on their valuations.
The redback has gone through several rounds of sharp depreciation this year.
The official daily fixing of the Chinese currency has depreciated some 4,000 basis points or over 6 percent year-to-date, marking the biggest annual drop in recent years.
Currently, the market is closely waiting for the Federal Reserve meeting and its interest rate decision this week.
Also potentially negative for the renminbi are seasonal factors related to the approach of the new year, a usual peak for outbound travel.
Will exchange rate tumble below 7 yuan against the dollar next year?
While we cannot rule out such a possibility, we should bear in mind that US President-elect Donald Trump may not want to see a much weaker renminbi after he takes the helm.
After all, he has been calling China a currency manipulator.
Some view the recent yuan weakness as a pre-emptive move to release some downward pressure on the currency ahead of the US rate decision.
In the medium to long term, only if China’s economy shows sustained weakness should the yuan suffer any further prolonged decline.
China’s stock market has been fairly calm towards the weakening yuan so far. Also, there has been no significant uptick in the volume of trade of the Chinese currency during its recent appreciation.
Instead, market trading has cooled off substantially, which might indicate that the yuan has already reached an equilibrium.
For the time being, investors may focus on sectors that are likely to benefit from a soft yuan, such as chemicals, defense, trading, property as well as companies with a sizable overseas business.
This article appeared in the Hong Kong Economic Journal on Dec. 12.
Translation by Julie Zhu
[Chinese version 中文版]
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