CLSA’s Wood: Aussie dollar to plummet, while Australian housing at risk, as China heads for tighter capital controls

China's currency moves are the most important factor in global markets, says noted strategist

PUBLISHED : Monday, 25 January, 2016, 9:29pm
UPDATED : Friday, 01 April, 2016, 3:32pm

Australia is the economy most at risk to the Chinese government’s efforts to tighten capital controls, according to noted equity strategist Christopher Wood of CLSA.

Wood, who authors the weekly Greed & Fear newsletter, recommended shorting the Aussie dollar and rated Australia as “the biggest underweight”, during his quarterly Asian investment strategy briefing Monday.

Wood also flagged concerns over Australia’s property market which has been fuelled in recent years by a huge influx of mainland investors attracted by its pre-sale payment requirements as low as 10 per cent. Many buyers might not be able to complete their purchase transactions if Beijing moves to enforce rules to stop capital flight, or choose not to if the market enters a downturn, he said.

“I am expecting the Australian dollar to go down to a minimum of 60 cents [against the USD]” Wood said.

Woods thinks that mainland authorities are regretting their push to set up offshore trade of the yuan in Hong Kong.

China, he says, will move to tighten capital control rules in the wake of recent speculative attacks on its currency

“If I’m running China today, my life would be much simpler if the offshore yuan didn’t exist,” he said. “My view since August is that the Chinese government was surprised by the speculative attacks on the renminbi we saw. My personal opinion is the offshore renminbi market was a mistake,” as it “gives a devaluation signal to the Chinese population,” he said. “And my view is the Chinese government understands it is a mistake, that is why they are trying to control it. That’s why they need to enforce capital control rules. I’ve never believed China will liberalise capital account rules,” Wood said.

Wood said he expects Beijing to prioritise control over internationalisation of the currency, and predicts the yuan will be stable against a basket of trade-weighted currencies as laid out by the People’s Bank of China in a policy initiative introduced in December.

Hong Kong’s dollar peg is to stay, and letting local interest rate to take the stress will be key to fending off speculative attacks on the Hong Kong currency, he added. The US dollar, which will remain strong for the short term, will weaken “once the market realises the Fed will resume easing at some point this year,” he said.

Wood said what goes on with the Chinese currency is “ten times more important” than its stock market, which he describes as “only a sideshow” that “historically has had very little correlation with the Chinese economy”. “People who are predicting a 30 per cent devaluation of the yuan don’t understand the Chinese government is actually serious about trying to foster consumption-driven growth. If you want to promote consumption-driven growth, you are not going to do a 30 per cent devaluation, because it would make Chinese consumers 30 per cent poorer in dollar terms and made it harder to rebalance [the economy],” he said.