Fall Of The RMB And Oil Prices Need Not Be Feared

by: Lok Sang Ho


RMB decline signals deceleration of the growth of Chinese economy, but it has been restrained and against a currency basket it has been stable.

Oil price declines benefit consumers, and consumption is the biggest component of GDP. While some countries hurt, other countries benefit.

Capital flight from China will translate into greater demand for world financial/real assets.

The financial markets recently around the world have been embroiled in gyrations not seen in years. Two of the factors people often attribute such gyrations to are the depreciation of the RMB and the collapse of oil prices. There are reasons to believe these negative impacts on financial markets have been exaggerated.

The depreciation of the RMB is considered to be a negative factor because it seems to confirm a widely held fear: that the Chinese economy is slowing down. The collapse of oil prices is considered to be a negative factor because it hurts the bottom lines of oil companies and undermines the finances of major oil producing nations, such as Russia and Saudi Arabia. There is concern that financial institutions exposed to oil-related debt might implode. Some say this could engender a crisis no tamer than the Global Financial Tsunami.

China being the world's second largest economy, its slowing down will have big implications of the growth of the global economy. However, its slowing down is really nothing new, and was in fact partly engineered. Chinese leaders had wanted more growth quality and less growth quantity. It is to their credit that they had changed their priorities. This is something to celebrate rather than to fear. It is also important to see that China's slowing down is no bigger than that of many other nations.

But the depreciation of the RMB has triggered an acceleration of capital outflow, and there is uncertainty over what will follow. My judgment is that unless Chinese policy makers panic and make some policy blunders, there is a silver lining behind the capital outflow. The capital outflow will inevitably translate into acquisition of foreign assets, which will enhance asset prices. This is already evident following a series of eye-catching acquisitions by Chinese companies such as the $43 billion acquisition of Syngenta by China National Chemical. The signs so far are that the Chinese policy makers are actually quite calm over the "depreciation", and have pointed out that while the RMB had depreciated against the dollar it has been pretty stable against a basket of currencies. The new CFETS stood at 99.23 as of Feb. 5 this year, not much different from 100 at the end of 2014. There is a good chance the capital outflow caused by worries for exchange loss will slow down.

The collapse of oil prices is of course counter to the interest of big oil companies and their creditors, and may cause problems for countries like Saudi Arabia and Russia. A legitimate question is how much exposure are the world's leading financial institutions to oil-related debt and whether such exposures have been hedged. But why should world markets as a whole be dragged down? Some countries' losses are balanced by other countries' gains. I see Japan and China, and other net oil importing nations, as benefiting from the oil price collapse. The oil price collapse is also a boon to consumers, and consumption is the biggest component of GDP. If there is something to worry, it is the environmental implications of accelerated oil consumption. From the global point of view, that is not actually welcomed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.