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China’s Weak Yuan Also Suggests a Weak Stock Market: UBS

Transport, banks and materials stocks had a higher share price correlation with the exchange rate, perhaps because they are more affected by general economic conditions


A weak yuan is generally tied to flat China share performances, a UBS economist said.
James Wang of UBS said another avenue where a depreciating yuan could lower stock value is via unhedged foreign debt on the balance sheet. File photo: AFP.

 

While a depreciating currency should theoretically be positive for exporters, a weak yuan is generally associated with lacklustre overall China share market performances, according to research by UBS.

The Swiss bank expects the Chinese currency to potentially break through the 7 per US dollar mark – from 6.80 – in the coming months and finish the year at 6.90.

“Historically a weak [yuan] was accompanied by subdued China share market performances perhaps as a depreciating yuan was typically associated with concerns around economic growth and capital outflows,” James Wang, head of the lender’s China equity strategy, said.

“While the China share market has already declined significantly this year, historically the share market could rarely sustainably rally when the exchange rate was depreciating sharply.”

 

Dollar-Yuan Exchange Rate

Wang said transport, banks and materials stocks had a higher share price correlation with the dollar-yuan exchange rate, perhaps as those sectors are more affected by general economic conditions.

The sectors most insulated from the currency moves include energy, telecoms, healthcare equipment and retailing, Wang added.

For other companies less affected, such as healthcare and hardware technology suppliers that should benefit from a lower yuan given their higher overseas revenue exposure, this did not always translate into better share price performances.

Wang said another avenue where a depreciating yuan could lower stock value is via unhedged foreign debt on the balance sheet.

 

  • George Russell

 

 

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George Russell

George Russell is a freelance writer and editor based in Hong Kong who has lived in Asia since 1996. His work has been published in the Financial Times, The Wall Street Journal, Bloomberg, New York Post, Variety, Forbes and the South China Morning Post.