Emerging markets worried as China’s yuan weakens

The recent slowdown in China’s economic growth is weighing on its currency, with the yuan (CNY) declining for a sixth consecutive month in August, extending the longest losing streak since the height of the country’s trade tensions with the US in October 2018.

The yuan, currently trading at CNY 6.94 to one US dollar, will fall further and cross the psychological mark of 7 per USD later this year, predict money managers at Société Générale, Nomura and Credit Agricole. A weaking CNY could undermine the export appeal of other nations and their currencies, with the South Korean won (KRW) and South African rand (ZAR) regarded as two of the most vulnerable

Extended anti- Covid-19 lockdowns, a fragile property market and this summer’s drought have all slowed growth sputters in the world’s second-biggest economy, pushing the CNY to a two-year low and further losses anticipated. Analysts predict that the impact will not be limited to China’s neighbourhood but extend far as Africa and Latin America - with a cheaper yuan hitting other nations’ exports and triggering competitive devaluations.

“With the yuan set to weaken further, other emerging markets will face downward pressure on their currencies,” predicts Per Hammarlund, chief emerging markets strategist at Skandinaviska Enskilda Banken. “The impact will be felt the most by nations which compete directly with China on exports.”

Goldman and Société Générale say the weaker yuan could pull the Taiwanese dollar (NT$), Thai baht (THB) and Malaysian ringgit (RM) lower, along with the KRW and ZAR. SEB sees the Mexican peso (MXN), Hungarian forint  (HUF), Romanian leu (RON) and Turkish lira (TRY) as the most vulnerable. 

“Trade and financial linkages have significantly strengthened between China and other emerging markets, prominently over the past decade,” said Phoenix Kalen, the head of research at Société Générale. “These deeply embedded relationships render the situation much more difficult for global emerging-market currencies to decouple from China.”

As a Bloomberg report notes, just months ago the CNY reigned supreme as emerging markets’ own haven asset, shielding investors from the turbulence of war and runaway inflation. The currency proved resilient in the days following Russia’s invasion of Ukraine on 24 February when the CNY was the only emerging-market exchange rate to avoid a decline, trading at an almost four-year high against MSCI Inc.’s benchmark index. Global demand for it deepened -- from countries like Russia and Saudi Arabia looking to reduce their reliance on the dollar to US bond investors seeking new havens.

Sentiment has since reversed as China’s economic slowdown fuels an exodus of foreign capital, even as domestic inflationary expectations surge. China’s central bank has sought to push back against the depreciation. It set the yuan fixing at a stronger-than-expected level for the ninth straight session, however the USD’s strength is undermining such defensive tactics.

A weaker yuan has wider repercussions for emerging markets, which have endured two years of elevated inflation, jitters over the Federal Reserve’s monetary tightening and the prospect of recession in key western markets. The Chinese currency, with its 30% weight in the MSCI Emerging Markets Currency Index, is pushing the gauge to the worst year since 2015.

Australia hikes rates for a fifth month

The Reserve Bank of Australia (RBA) has raised its key interest rate by 0.50% to 2.35%, marking the fifth consecutive monthly hike for a fifth month and extending Australia’s fastest pace of increases in borrowing costs in almost three decades.

The half-point rise lifted the cash rate to the highest since 2015 and was in line with the expectations of most economists.

RBA governor Philip Lowe said that the central bank “remained committed to returning inflation to the 2–3% range over time. It is seeking to do this while keeping the economy on an even keel.”

Lowe’s statement was similar in its language to a month ago, when the RBA raised its cash rate by a similar amount. He said the bank’s board “expects to increase interest rates further over the months ahead, but it is not on a pre-set path”.

Hedge funds “bet US$37 billion against Italian debt”

Investors anticipate an Italian debt default triggered by the country’s shaky bond market and the impact of the global energy crisis, according to reports.

They state that hedge funds are betting against Rome’s liabilities as Standard & Poor’s (S&P) Market Intelligence data “indicates investors have amassed a US$37 billion short bet against Italian debt. The hedge funds are betting large against Italian bonds and investors haven’t bet this high against Rome since 2008, as Italy faces political uncertainty, an energy crisis, and an inflation rate of 8.4% in July.”

Like its European neighbours, Italy is grappling with an energy crisis resulting from Russia’s invasion of Ukraine and the government has already appealed to the public and business to voluntarily limit their use of gas and electricity this winter.

“Bond borrowing schemes highlight how investors borrow Italian liabilities in order to bet that values will decline before the debt buyback is due,” the reports suggest. “S&P Market Intelligence shows €37.2 billion of Italian bonds were borrowed by 23 August,” a figure last seen in January 2008 during the global financial crisis.

The energy crisis takes place as Italy undergoes a renewed bout of political instability, with the country due to elect a new parliament on 25 September. Mario Draghi continues to lead as acting prime minister, but in July announced his resignation following the rejection of a confidence vote by three of his key coalition partners.

Ghana’s central bank reassures on CBDCs

The Bank of Ghana has attempted to ease fears that any introduction a central bank digital currency (CBDC) will disrupt or negatively impact the operations of the country’s mobile money operators (MMOs).

Clarence Blay, the Bank of Ghana (BOG)’s assistant director of fintech and innovation said the central bank would ensure that operations of MMOs are not disrupted, adding that the Bank expects Ghana’s digital currency – aka the e-cedi – to improve the efficiency of Ghana’s settlement systems as well as to “fast-track cross border trade.”

Blay added that a central principle guiding the roll-out of the e-cedi is to complement mobile money operations. The e-cedi would not supplant existing platforms, but enhance existing mobile money services, making then more vibrant and efficient and improving the country’s financial inclusion.

In other CBDC news, Saudi Arabia’s central bank has appointed Mohsen AlZahrani to lead its virtual assets and central bank digital currency program in a sign of the Gulf state’s growing acceptance of crypto. AlZahrani is a former managing director for consultancy firm Accenture.

Saudi Arabia has traditionally adopted a cautious approach on virtual assets, and officials have had concerns about the speculative nature of digital coins. Riyadh banned banks from processing transactions involving crypto in 2018, though there were workarounds for trade.

Abu Dhabi bank “plans US$1 billion bad debt sale”

Abu Dhabi Commercial Bank (ADCB), the third-biggest lender in the United Arab Emirates (UAE) is reported to be in talks to sell about US$1 billion of bad debt to clean up its balance sheet, which has been battered by a series of high-profile corporate defaults.

The deal could be one of the Gulf region’s biggest such sales. The news follows a recent announcement that ADCB has hired a group of banks for a sale of US dollar-denominated debut green bonds. Barclays and ING were hired as joint sustainability structuring advisors, with ADCB, BofA Securities, JPMorgan, Mizuho and SMBC Nikko joining them as joint lead managers and book runners.

The banks arranged a series of investor meetings and an issuance of five-year senior unsecured green bonds of benchmark size will follow, subject to market conditions. Proceeds from the planned debt sale will finance or refinance green loans eligible under ADCB’s green bond framework.

South Korea’s banks told to manage FX liquidity conservatively

South Korea's financial regulator said that it has advised local banks to adopt a more conservative policy in managing their foreign-exchange liquidity positions in response to the possibility of a prolonged period of US dollar strength.

The Financial Supervisory Service (FSS) said in a statement the advice was given during a video meeting with senior officials at major local banks and branches of foreign banks.

While the overall foreign exchange liquidity position appears to be stable despite the won’s (KRW) sharp decline over recent months against the dollar, deputy governor Kim Young-ju of the agency recommended banks manage liquidity in a “more conservative” manner, the FSS said.

He added that banks should ensure a stable management of existing foreign-exchange funding, and suggested they explore new funding avenues.

South Korean President Yoon Suk-yeol and other top officials have said the KRW’s 13% depreciation against the USD since January did not reflect any issues with domestic fundamentals, but rather was largely driven by broad US currency strength.

Deutsche Bank adds representative office in Bangladesh

Deutsche Bank will expand its global network with the launch of its first representative office in Dhaka, Bangladesh, which the bank said will see its regional footprint in Asia Pacific span 15 diverse markets.

Responding to “strong client demand for trade finance support in this fast-growing country,” the Dhaka office will focus on supporting multinational corporate clients, predominantly exporters to Bangladesh. The bank has hired Syed Naushad Zaman, previously Deputy Head of the Commerzbank Representative Office in Bangladesh, to lead its business in the country.

“We continue to grow and invest in our business in Asia Pacific,” said Deutsche Bank’s CEO for Asia Pacific and Member of the Management Board Alexander von zur Muehlen. “We are proud that in our 150th anniversary in Asia Pacific, we are welcoming a 15th market to our strong regional network.” Atul Jain, Deutsche Bank Global Co-Head for Trade Finance and Lending, added, “Bangladesh is an increasingly strategic market for both our global multinational and German corporate clients.”

The Embassy of Bangladesh reports that Germany is the largest trading partner of Bangladesh in Europe and the second largest globally. German exports to Bangladesh have tripled in the past 25 years. In 2021 German exports to Bangladesh grew by 45% to US$877 million, of which machinery and equipment made up almost US$400 million.

Citi and Validus partner on US$100 million SME securitisation facility

Citi and financing platform Validus have partnered for a US$100 million securitisation facility collateralised by loans from small businesses originated by Validus in Singapore.

The facility is designed to extend credit to small and medium-sized enterprises (SMEs) in Singapore and across Southeast Asia. The facility is supported by First Plus Asset Management, a Singapore-based multi-asset investment manager focused on Asia structured credit and equities. Validus is also raising its Series C equity round for an undisclosed value. The combination of the securitisation facility and Series C equity funding will support Validus’ plans for growth, which incorporates introducing neo-banking products in Southeast Asia.

The collaboration between a large global bank and a fintech is reported to be the first-of-its-kind in Southeast Asia in terms of deal and structure and was launched in early Q2 2022. Validus reported strong growth in loans in despite the Covid-19 pandemic and rising interest rate environment. In the past two years the group expanded monthly volumes by over eight times and tripled its loan book.

“This collaboration with Citi underscores the quality of our origination, credit portfolio management, strength and resilience of our business, in today’s market environment. With this evolution in our financing strategy, as well as the support of Citi as an established player in the asset-backed securities space, we are now even better positioned to support the growth of SMEs with accessible and effortless business finance” stated Validus’ Head of Corporate Development, Milena Naitoh.