Renminbi devaluation sparks deflation fears

Renminbi devaluation sparks deflation fears

China’s decision to weaken its currency is "just as significant as the oil price drop" – and commodity-based economies like Australia will be the hardest hit, according to AB.

The People’s Bank of China moved to devalue the renminbi by 1.9 per cent on Tuesday morning, igniting concerns about increasing global deflationary pressure.

The People's Bank of China (PBoC) slashed the renminbi (RMB) by an unprecedented 1.9 per cent, causing the Australian dollar to fall to 73.2 US cents in response.

Speaking in Sydney yesterday, AB (AllianceBernstein) director of Asia Pacific fixed income, Hayden Briscoe, said commodity-based economies will be the hardest hit.

“The important thing to think about here from a global perspective is if the renminbi has just devalued, it has effectively unleashed a deflationary impact on the rest of the world,” Mr Briscoe said.

“Every commodity-based currency is now under pressure as well because they’ve just lost some revenue on that devaluation.”

“This is just as [significant] as the oil price drop, because everybody trades with China,” he said.

According to Mr Briscoe, Australia should be more concerned with the PBoC devaluing its currency to the US dollar than the US Federal Reserve raising rates.

Mr Briscoe said that Australia's economy will take a hit in terms of export revenue.

Moreover, the 1.9 per cent price drop questions whether the RMB is on track to full internationalisation.

“You get a lot of questions around whether this is likely to derail the PBoC’s short or long term objectives of opening up the currency,” he said.

“I don’t think it’s changed anything, because China tends to play the long term game.”

Mr Briscoe referred to the official statement by the PBoC, which noted that the devaluation was a once off.

As a result, Mr Briscoe argued that the RMB is likely to appreciate in value over the long term – at around one per cent – three per cent per annum.

The RMB is still likely to become the central liquidity provider within the Asia Pacific.

“Just as the [US Federal Reserve] is withdrawing global liquidity, there’s a new kid on the block called the PBoC and they’re the liquidity provider within the region."

“The RMB is starting to get more utilised within the Asia Pacific… and the cycles will start to get more de-synchronised.”

Mr Briscoe noted that the increased take-up of the RMB is part of a regional, rather than global, macro trend.

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