Thai stocks down, currency war fears after China devalues Yuan

Thailand other Asian stock markets faced severe downward pressure as China yesterday devalued the yuan again and halted stock trading for the second time this week following more than a 7-per-cent plunge.

Across Asia, equities dropped to a three-month low due to the ripple effects of the trading halt and China's 0.51-per-cent devaluation of its currency, which fell to 6.5646 per US dollar - the lowest since March 2011.

Thai stocks closed down 2.79 per cent after an initial loss of nearly 2 per cent in the opening session, while China's Shanghai Shenzhen CSI 300 index plunged 7.2 per cent before the automatic circuit-breakers halted trading activities.

It was the second halt in trading this week as the Chinese index fell from 3469.066 basis points on January 4 (the first day of trading in China) to 3284.737 points as of yesterday.

Analysts also expressed concern that the latest yuan devaluation would trigger a currency war among Asian currencies leading to more devaluations in the region to shore up the competitiveness of exports.

The baht had also weakened from Bt36.03 (S$1.40) per US dollar on December 31 to Bt36.27 per US dollar as of 2.30pm yesterday.

Questions over China's economy

While China's official GDP growth projection is still around 6.9 per cent for 2016, analysts have suggested that the economy might not grow that robustly, given the sluggish global economy whose growth rate was revised downward to less than 3 per cent.

Such an unfavourable outlook has put heavy pressure on the Chinese stock market, especially as the state's stock market support measures are about to be withdrawn.

Chantavarn Sucharitakul, assistant governor of the Financial Markets Operations Group at the Bank of Thailand, said Thai money markets' fluctuations after the New Year had been mainly caused by external factors, including Chinese stock price plunges totalling 12 per cent this week.

She attributed the sharp decline to a slowdown of China's PMI (Purchasing Managers' Index) numbers that shows a troubled economy while the devaluation of onshore and offshore yuan by 1.5 and 1.9 per cent respectively underlined the magnitude of the challenge.

In addition, the ongoing geopolitical crisis in Middle East between Iran and Saudi Arabia and the claim of a hydrogen-bomb testing by North Korea have shaken investors' confidence.

Nevertheless, there are no irregularities and the private sector should continue to closely monitor the fluctuations and adopt measures to prevent exchange-rate risks, she said.

The baht has been moving in the range of Bt36.08-Bt36.35 per US dollar since the beginning of the year, which represents a depreciation of around 0.7 per cent when compared to the greenback, reflecting other currencies in the region and the ongoing fluctuation in the global money markets, Chantavarn added.

Maybank Kim Eng Securities' Thailand economist, Tim Leelahaphan, is still optimistic, saying: "This does not reflect China's economic fundamentals since we still believe that the economy will be able to expand by 6.6 per cent this year."

The National Economic and Social Development Board currently expects Thailand's GDP to expand by 3 to 4 per cent in 2016 based on the assumption that China will be able to expand by 6.7 per cent this year.

Prinn Panitchpakdi, country head at CLSA Securities (Thailand), said China may not have the intention to trigger a regional currency war as the country shifts its economy towards more domestic consumption that requires a stable exchange rate.

He said the yuan inclusion in the International Monetary Fund's SDR (Special Drawing Right) basket, the slowdown in Chinese exports and the strengthening of the US dollar after the Federal Reserve rates hike has led to the depreciation of other currencies in the region, prompted China to devalue its currency to maintain competitiveness.

"Beijing simply does not want to repeat the same mistake of allowing the yuan to remain relatively strong when other currencies around it have depreciated like last year when the mid-point cut in August almost immediately improved their export situation," he added.

Last year China halted the trading of at least 1,331 companies on mainland stock exchanges, representing around US$2.6 trillion (S$3.7 trillion) worth of shares, or about 40 per cent of the country's market capitalisation. That suspension is ending today.

"CLSA still expects China to expand by 6.6-6.7 per cent this year and they have many tools to stimulate their economy and to suppress the situation in their capital markets, including the use of the state-owned enterprises to buy up shares in order to stabilise their market," Prinn said.