James Klempster, portfolio manager, said the magnitude of yuan weakening was too small to start a currency war.
China’s central bank let the yuan weaken about 3% since August 12 by making the exchnage-rate more market-driven.
“While important symbolically, the size of the move is relatively small. The yuan had been managed up consistently by 33% over ten years, whereas the fall of circa 3% over a few days is sharp but not large,” Klempster wrote in a recent market report.
“It seems unlikely, therefore, that China is aiming for a currency war in Asia.”
Following the currency depreciation, there were widespread concerns that other central bankers in the region and in emerging markets would also devalue their own currencies to make exports competitive. But recently, the People’s Bank of China quashed rumours of a 10% devaluation.
“One possible reason why China may be devaluing [its currency], which has received less coverage than the currency-war thesis, is that China is becoming increasingly worried about deflation,” said Klempster.
“Over $1.6trn in foreign currencies has been borrowed by various Chinese bodies, and while devaluation of the yuan makes serving this debt more difficult, at least an inflationary environment would ensure that the real value of outstanding local debt does not also increase,” said Klempster.
There has been a substantial decline in key input costs for China due to the fall in commodity prices, especially oil prices, the firm said.
China has been facing disinflation as producer prices continue to fall. The producer price index (PPI), which measures the average change in price of goods and services sold by manufacturers, fell 5.4 percent year-on-year in July, widening from the 4.8-percent drop seen a month earlier, according to state figures.
The disinflationary trends could put pressure on China’s growing debt burden, Momentum said.
China is one of the fastest debt-accumulating nations, according to a recent JP Morgan Asset management note, even as its total debt-to-GDP ratio of 217% remains moderate compared to most of the developed world.
