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Stay Invested in US, Dollar as China Virus Jolts Global Markets

Stay Invested in US, Dollar as China Virus Jolts Global Markets
(Dollar Photo Club)

By    |   Monday, 03 February 2020 08:20 AM

Chinese financial markets opened after the extended Lunar New Year holiday.

As expected, the equity markets have fallen reflecting concerns about the impact of the coronavirus on the Chinese local economic outlook.

The benchmark Shanghai Composite Index fell 7.7 percent today, which equals a loss of about $375 billion in market value and that represents its steepest one-day decline since August 2015. The Shenzhen Composite Index dropped 8.4 percent while the offshore yuan (CNH) weakened to 7.0141 to the dollar, the Wall Street Journal said.

Investors could do well keeping in mind that there are two kinds of Chinese yuan: the offshore (CNH) and the onshore (CNY). The offshore yuan (CNH) also trades outside mainland China and mostly in Hong Kong but also in Singapore, London and New York.

Besides that, the People’s Bank of China (PBOC) has injected 1.2 trillion (CNY) yuan or about $174 billion into markets via reverse repo operations today and has also eased regulation for the financial sector, the South China Morning Post reported.

Chinese authorities also have a number of measures of control over the markets. So, future negative moves may not fully reflect market forces therefore.

With Chinese markets reopening, for investors it is perhaps worth reflecting on what the coronavirus means for the global economy.

There are a few points that merit a somewhat closer look:

  • Globally, it is fear of the coronavirus that does the most damage. Fear of the coronavirus changes consumer behavior. Fear of the coronavirus changes policy makers’ behavior. Social media is very good in spreading fake news and fueling fear. Google trend searches for coronavirus have increased globally. However, it was the Super Bowl that has been trending on Twitter. Outside of China, and in a few Asian economies, fear seems to be contained so far. Consumer behavior seems unlikely to be affected in the United States or Europe, at least at the moment. 
  • Aside from fear, reduced China economic activity will reduce China’s demand for imports. However, the investment slowdown has already reduced Chinese demand for imported investment goods over the course of 2019. The coronavirus situation doesn’t really change that. What’s for sure is that imports of raw materials and imports of finished consumer goods are at risk. The dramatic decline within China has visibly reduced demand for oil for example. Chinese oil demand has dropped by about three million barrels a day, or 20 percent of total Chinese consumption. The drop could force the hand of the OPEC cartel, which is considering an emergency meeting to cut production and staunch the decline in prices. Investors should keep in mind that China is the world's largest oil importer, after surpassing the U.S. in 2016, so any substantial change in consumption will have an outsize impact on the global energy market, the Straits Times of Singapore reported.
  • Factory shutdowns in China will affect earnings of foreign companies that manufacture in China for the Chinese market. This is not very important to the global economy, but it does of course matter more to the global equity markets.
  • Global supply chains may be disrupted if Chinese manufactured components are not delivered on time. A brief extension of China New year holidays’ period is not enough to cause significant disruption. International companies should hold inventory of the parts that they need, especially because it takes over a month to ship goods from China to the United States or to Europe. But a longer shutdown in China does imply the risk to cause more disruption outside of China.
  • Global GDP will be affected simply because China will grow more slowly. This will generate headlines but it doesn’t really matter. Global GDP is a pretty meaningless aggregation. What matters is how other economies are reacting. 

Because of all that and of course because of a lot more, my preference for investing, at least for the time being, remains the U.S. and the U.S. dollar.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Because of all that and of course because of a lot more, my preference for investing, at least for the time being, remains the U.S. and the U.S. dollar.
china, virus, invest, us, america
Monday, 03 February 2020 08:20 AM
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