Caution lingers following PBoC’s FX reserves disclosure

Added 10th September 2015

China-related mayhem appears to be the dish of the day, with a fresh serving of troubling data weighing on the minds of investors.

Caution lingers following PBoC’s FX reserves disclosure

Apart from having to grapple with wild currency swings and having to reassess risks that are tilting towards the downside, investors now have to consider carefully the level of foreign reserves in the People’s Bank of China.

Earlier this week, the PBoC revealed that the country’s foreign-exchange reserves had plunged by a record $93.3 billion in August – the biggest drop in dollar terms and the largest in percentage terms since May 2012. Its disclosure gave investors pause.

“This sharp drop highlights the strain endured by the PBoC in order to stabilise its domestic economy,” said Marc-Ali Ben Abdallah, senior strategist at Amundi Asset Management. He added that it could be a harbinger of a more substantial deterioration in Asian corporate credit conditions.

Ben Abdallah’s view is similar to that of Al Clark; the latter is Nikko Asset Management’s global head of multi-asset. Clark said earlier this week that Nikko AM downgraded Asian equities a month ago when it started becoming “nervous about what is happening in Asia”. Clark revealed that Nikko AM will remain underweight in Southeast Asia and that he stated that emerging markets, as an asset class, are not attractive.

Jeremy Stevens, Asian economist for Standard Bank also holds a negative view about the recent unfolding of events in China.

“We believe that China’s bumpy downshift in growth is likely to continue, making for greater macro and market volatility along the way. Further weakening of the currency will do little to counterbalance this macro backdrop,” Stevens said.

Most recently, Moody’s adjusted downwards its GDP growth forecasts for many Asia Pacific sovereigns. Moody’s pointed out that weak demand from China has dampened the overall export outlook for Asia Pacific, with softer commodity prices weighing on export revenues, growth and fiscal balances.

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