Expect currency wars in 2016, DBS chief warns

2016 will be a year of "currency wars" and a yuan depreciation could lead to more corporate defaults by unhedged Chinese companies, DBS CEO Piyush Gupta warned on Wednesday, adding that he thinks the greenback could start to weaken as early as the second quarter.

The Singapore economy will also go through "perhaps the trickiest and most sensitive time in its economic transformation that we'll see for a long time", he told DBS private bank clients at a luncheon at the Ritz-Carlton, Millenia Singapore hotel.

In a 20-minute talk, Mr Gupta said he expects China to let the yuan depreciate and the US dollar to possibly weaken in the second half of the year, while Europe and Japan pursue an "easy monetary policy".

"I think if you had to put a label on 2016, I would say this is going to be a year of currency wars. I think everybody, by the end of the year, will all be trying to weaken their currency.

"The problem is what you weaken against," he added, quipping "frankly, I'm not smart enough to give you the answer to that".

Highlighting China's yuan depreciation as "perhaps the single biggest risk that you should be focused on this year", he said the country was likely to let its currency depreciate "a little" against the greenback partly because exports "are proving to be a drag".

Yuan depreciation could trigger more corporate defaults by Chinese firms that have borrowed heavily in US dollars and raise counterparty risk, he said.

"There's been a lot of Chinese corporate borrowing, a lot of it dollar borrowing in the last year or two, and a lot of it is unhedged. Therefore, a lot of Chinese corporates will see in the next year or two what ASEAN saw in 1998 . . . your capacity to be able to service debt is going to be challenged."

Mr Gupta added that there were still large parts of China that are "massively underinvested", such as its healthcare, services and environmental sectors, while other sectors suffered from overcapacity.

"They really have a challenge of correcting this misallocation of resources. This kind of misallocation . . . cannot be cleaned up in three months, six months . . . it will take them a couple of years."

Another risk for investors in China stems from the Chinese authorities' focus on financial sector liberalisation, which he said was being done "faster than anybody expected" and would likely create a lot of market volatility.

Pointing out that investors should not view China as just one man - President Xi Jinping - making all the decisions, Mr Gupta said policymakers' response to market volatility could appear "ham-handed or even heavy-handed, and you could fall on the wrong side of that".

But he stressed that China was "not falling off a cliff" economically, adding that the manufacturing slowdown was engineered by the Chinese government. "China has risks, they're real risks, but I do think the macro economy in China is not what you need to worry about."

For the rest of Asia, Mr Gupta said it was unlikely that South-east Asia would see a "1998 redux" since its economies were a lot more robust this time around. Nonetheless, he said other Asian economies would likely take a "supply chain" hit due to China's shift to a more consumption- driven economy.

Singapore will be particularly challenged, he said, noting that the Republic was trying to deflate parts of the economy, particularly the housing market, while trying to restructure the supply side through a labour crunch.

"This is not an easy transition for us . . . this is perhaps the trickiest and most sensitive time in Singapore's economic transformation that we'll see for a long time."

Talking about the US, Mr Gupta said he did not think the world's biggest economy was as strong as many might believe, adding that he expects fewer than four rate hikes in the US this year.

"Core capex orders in the US continue to be pretty much zero . . . there are large pockets of disinflation in the US and investment is not going in", while US exports are also sluggish because the greenback has been "too strong", he said.

"I think we will continue to see a strong dollar in the short term but I would not be surprised if the heyday of the strong dollar will be done by the second quarter. And, frankly, given that it's an election year and there will be some impact from that, I would not be surprised to see jawboning for the dollar down in the second half of the year."

Mr Gupta also expects global growth to be in the 3-3.5 per cent range for 2016, with low oil prices potentially boosting GDP by 0.5 percentage point, and added that value investors might be able to find opportunities in sectors such as commodities and Singapore banks.

"I think there's value in Singapore banks and I'm not necessarily talking about DBS. Singapore banks were trading at 1.3 times book three months ago; they're trading at one times book now. At their lowest, they were trading at 0.75 times book. Nothing fundamentally has changed."

DBS shares slipped S$0.14 to S$16.10 on Wednesday.