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60 seconds with Craig Botham on China volatility and currency depreciation

The outlook for China’s economy remains opaque, but Craig Botham says recent market volatility has been driven by technical factors and a big devaluation for the currency remains some way off.

15/01/2016

Craig Botham

Craig Botham

Emerging Markets Economist

Technicals drive China slide

The year started off very poorly in the Chinese market. Equities fell 7% on the first day of the year and continued to fall over the next few days.

Furthermore, some weak data triggered concerns of a new leg down in the Chinese economy.

In our view, the market leg down has been mainly driven by technical factors and has almost no relationship at all to economic fundamentals.

As we saw in the rally at the start of last year and the subsequent slump, it has been driven much more by sentiment and speculation than by any real solid economic data.

Big devaluation on the cards?

The other potential area for concern is the currency.

We have seen a great deal of depreciation, particularly compared to the historic standard for China.

Investors are worried that we will see a big devaluation.

We think that a gradual depreciation is more likely, but this can still be quite negative for the world economy, because it means you can get deflation exported from China to the rest of the world.

But still, the more disruptive scenario of a big devaluation seems some way off.

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