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Chinese Yuan in Danger: Will The Dollar Be Next?

Chinese Yuan in Danger: Will The Dollar Be Next?
November 23
16:26 2015

Financial experts and money mangers are worried about China. The country’s surprising decision in August to devalue the yuan by 1.9% doesn’t seem to have been enough to boost its struggling economy. Analysts predict that whatever the country does next will have global repercussions.

Goldman Sachs and other banking firms echo these concerns as hedge-fund managers reduce their holdings in US-listed Chinese firms. Hedge-fund manager and founder of Appaloosa Management David Tepper said last week that the yuan is tremendously overvalued and must fall further.

Appaloosa was one of the first companies to begin axing its holdings in Chinese companies and recently sold its entire stake in Alibaba Group Holding Ltd.

Billionaire Crispin Odey, founder of Odey Asset Management, predicts that China will devalue its currency by at least 30%.

Meanwhile, the Chinese economy continues to suffer from falling exports and rising nonperforming loans. The country’s goal is to see an economic growth of 6.5% during the next five years. But according to Royal Bank of Canada and Rabobank Groep, that goal will not be met unless the yuan falls by 8% or more vs the US dollar by the end of next year.

According to billionaire Dan Loeb, “The downside scenario for China seems more intimidating than ever before. The new question is not whether but how severe the slowdown of the world’s foremost growth machine will be.”

John Burbank warned his investors to be wary. The world may be approaching a “global downturn that leaves no region safe, including the United States,” he wrote. Burbank advised that “investors should prepare for a worsening global economic environment and the potential for recessions in both the US and globally.”

Last month, many of the US-traded Chinese shares sold by the aforementioned money managers experienced a rebound. According to Goldman Sachs, a potential rebound in emerging-market assets in 2016 could lead to the “significant depreciation” of the yuan. If policy makers let the currency wither, the effects could ripple throughout emerging markets.

Others remain optimistic. Daniel Martin, former EIU Global Economist, explained on Bloomberg that we are “moving past the worst.” While the headlines were all about “doom and gloom” a few months ago, “conditions are starting to stabilize in China.” Headlines, however, tend to remain focused on the negative. Part of the reason for this, says Martin, is that, “we don’t really know from the hard data” what exactly is going on.

Taconic Capital Advisors told its investors that “we are not in the doomsday camp as it relates to China. Growth has slowed, but not as much as some feared, and the Chinese government continues to have a number of levers to pull to support its economy.”

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April Kuhlman

April Kuhlman

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