Thursday 28 Mar 2024
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KUALA LUMPUR: China’s unexpected move to devalue its yuan will impact Malaysia negatively, albeit in the short term, said HLIB Research, expecting commodity export earnings to be squeezed.

“With its status as a large buyer of global commodities as well as importer of both goods and commercial services, a protracted slowdown of the Chinese economy will have massive implications, particularly for its trading partners,” the research firm explained in a report yesterday.

“China’s decision to fight back in the export space via devaluation will eventually eat into the global demand pie that Malaysian exporters have been enjoying due to ringgit depreciation,” it said.

HLIB Research expects Malaysia, being a net commodity exporter, to face a further squeeze in commodity earnings.

“We [also] expect concerns about Malaysia’s fiscal deficit and current account surplus to resurface, amid the declining reserves level of the central bank,” it said.

HLIB Research also pointed to confidence in the ringgit which continues to be eroded due to ongoing domestic issues.

“We understand that there is now rampant hoarding of foreign currencies, especially by exporters. Meanwhile, foreign currency deposits have gained further popularity. All these have further weakened the ringgit and drained reserves from Bank Negara Malaysia (BNM),” it said.

HLIB Research is widening its ringgit forecast range to RM3.55 to 4.20 against the US dollar.

“We opine that the People’s Bank of China (PBoC) will allow yuan to drift lower vis-à-vis the US dollar by a total of 5% by end-2015. All regional currencies, including the ringgit, are also expected to depreciate broadly in similar magnitude,” it said, reiterating its view that BNM will continue to leave the overnight policy rate unchanged at 3.25% this year.

On Tuesday, the PBoC announced the adoption of a new US dollar-yuan fixing mechanism which requires dealers to provide foreign exchange quotes based on last market close, and supply and demand and changes in major currencies’ exchange rates. The move unexpectedly reset the yuan’s trading band 1.9% lower at 6.2298 against the US dollar, the weakest point against the US dollar for almost three years.

Standard Chartered Research sees the Singapore dollar and the ringgit to be most impacted by the US dollar-yuan fixing.

“In terms of exports to China [as a percentage of total exports], Malaysia and the Philippines have the highest exposure to China and seem most exposed to yuan weakness,” it said in a report.

Morgan Stanley Research said the negative sentiment driven by near-term movements in the yuan would put pressure on global financial markets and indirectly impact the global economic outlook.

“If the yuan valuation adjustment is slow and gradual, this might not be able to convince the market that the adjustment is complete, and this could increase demand for position unwinding and hedging. However, if the adjustment is sufficient or overshoots, driven by near-term market sentiment, then it could reduce persistent pressure for position adjustment,” it said in a note on China yesterday.

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This article first appeared in digitaledge Daily, on August 13, 2015.

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