China’s Firmer Stance on Yuan Sparks Relief in Emerging Markets

Signs that China is becoming more forceful in supporting its markets provided some relief for developing-nation assets battered by concerns over the world’s second-largest economy.

(Bloomberg) — Signs that China is becoming more forceful in supporting its markets provided some relief for developing-nation assets battered by concerns over the world’s second-largest economy.

Emerging-market stocks jumped, halting a nine-day losing streak that was the longest since April last year. Chinese equities staged a sudden rally in late Asian trading, hours after Beijing escalated its defense of the yuan, bolstering sentiment toward other risk assets. 

The South African rand and South Korean won — two of the currencies hit hardest by the yuan’s recent losses — were among those leading the advance on Tuesday. 

It’s unclear how long the reprieve will last. Strategists say China’s moves to stabilize the yuan aren’t enough to halt its depreciation as the lack of any significant steps to boost consumer spending and a spreading crisis in the property sector further undermine investor confidence. Emerging markets have endured the worst August selloff in years on concerns over China’s sputtering growth and expectations that the US Federal Reserve may keep interest rates higher for longer.

“The rebound in Chinese stocks provides emerging markets with some respite,” said Piotr Matys, a currency analyst at InTouch Capital Markets in London. “But concrete measures from Beijing are needed to address structural issues in the Chinese economy which are a major source of concerns for investors to anticipate sustained improvement in risk appetite.”

Several traders attributed the sudden surge in Chinese stocks to technical reasons in the absence of any fresh triggers, though speculation about the possibility of buying by state-backed funds was also rife.

In Hong Kong, the Hang Seng Index climbed nearly 2% within minutes, after a seven-day losing run that was the longest since late 2021. The CSI 300 Index, the benchmark for mainland shares, finished up 0.8% after erasing a loss of as much as 0.7%. 

China pushed up funding costs in the offshore market, making it more expensive for speculators to bet against the yuan. It also established a new record with its stronger-than-expected reference rate for the currency. The People’s Bank of China set its daily fixing for the currency at 7.1992 per dollar Tuesday, compared with an average estimate of 7.3103 in a Bloomberg survey. That was the largest gap since the polls began in 2018. 

MSCI Inc.’s developing-nation equities gauge rose 0.7%, lifted by consumer discretionary, utilities and technology stocks. 

The South African rand was the top gainer across emerging markets, strengthening for a fourth day. A summit of the BRICS bloc — Brazil, Russia, India, China and South Africa — kicks off on Tuesday in Johannesburg. The nations’ leaders will focus on ways to reduce dependence on the dollar when they meet, South African Deputy President Paul Mashatile said.

Aside from any news arising from the summit, investors will be looking for insights on the outlook for global interest rates from central bankers at their annual gathering in Jackson Hole, Wyoming, later this week. The key event is a speech by Federal Reserve Chairman Jerome Powell due on Friday.

Brendan McKenna, strategist at Wells Fargo & Co. in New York, said he has been urging investors to shift to a more defensive position, with “risk-sensitive” assets set to underperform. 

“China’s economic deceleration and brewing real estate crisis represent the biggest challenge EM is currently facing,” he said. “Volatility may pick up as China’s problems intensify and the Fed stays higher for longer.”

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