China's 'liberalisation' manipulation game

  • US economy likely to be impacted most from Chinese devaluation
  • IMF deadline signals further yuan liberalisation in coming year
  • Alibaba investors disappointed despite rise in profits
  • US crude stocks fall, yet supply glut remains
City of London

Global financial markets shuddered to new multi-month lows today, fuelled by a growing degree of uncertainty surrounding exactly how far China is willing to go to devalue its way back to health. A second cut to the yuan in as many days draws the conclusion that this is likely to be somewhat more regular than the PBoC would have you believe.

The US are the biggest losers in this; while everyone outside the States is used to changes in the value of the yuan, the currency's close relationship with the US dollar means that USD/CNH has moved to its lowest level since 2011. 17% of all Chinese exports go to the US, which represents 20% of all US imports. Given the recent appreciation of the US  dollar, and subsequently the yuan, the recent selling in European markets seems somewhat overcooked given that EUR/CNH is still yet to create a new 2015 high.

The question is whether this signals the beginning of a new phase of devaluation, driven by the need to prop up Chinese growth and exports. Given last week's IMF report, which allowed China until September 2016 to make the needed adjustments for entry into the fabled SDR currency basket, a freer yuan would benefit China in more ways than one. The peg only made sense while China could hitch a ride on US dollar depreciation in the currency wars, not with a tightening Fed and easing PBoC.

With a PBoC conference due to be held overnight, something tells me we could see yet another leg lower for the yuan tomorrow.

Alibaba shareholders were willing to forgive a profit miss today, but not disappointment on underlying sales or revenues and that is exactly what saw the ecommerce giant come unstuck today. Given the whole raft of investments across a whole number of businesses, a significant fall in earnings was always expected. Yet the underlying strength of sales and revenues would pave the way for future growth. Or so they thought. Ultimately, the slowdown in Chinese growth and spending is taking its toll on domestic consumption, and with many investments failing to yet bear fruit, it was left to the TaoBao brand to continue carrying the firm, a state of affairs that cannot continue forever.

US crude oil inventories continue to fall, albeit at a slower rate, falling by 1.7 million barrels. The worrying signs for crude bulls is that with prices at a six-and-a-half year low, US producers continue to pump in fresh supply to add to the rise in OPEC and Iranian crude stockpiles that continue to flood the market.

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