Across The Border | Have expectations of a weaker yuan been reversed?
Temporary pain for China bears should not obscure existence of fundamental problems, analysts say
Bearish expectations for the mainland Chinese currency and stock markets have not been reversed as the economy struggles to transform from “old” to “new”, with analysts saying that recent heavy losses for China bears do not mean that fundamental problems have been fixed.
China bears have been bleeding after the People’s Bank of China (PBOC) stepped in to support the yuan when they placed high-profile bets on further declines of the currency following a surprise devaluation in August.
At least US$562 million of options that would have paid out if the currency dropped below 6.6 per US dollar – its weakest point since the devaluation – have expired worthless since August, Bloomberg reported, with another US$807 million to lapse within three months.
Mark Tinker, head of AXA IM Framlington Equities Asia, cautioned it was “not to say that the fundamentals have improved, rather that the ... markets had become over-extended to the downside”.
“This rotation will have been extremely painful for many, but as ever, we must not confuse this with underlying fundamentals,” he said.
Many economists say the mainland economy has yet to bottom out, and arguably increasing its dependency on an already overheated property industry. Based on concerns over a rickety, debt-laden financial system, rating agency Moody’s has downgraded the outlook for mainland sovereign and banking sector credit.