While a depreciating currency should theoretically be positive for exporters, a weak yuan is generally associated with lacklustre overall China share market performances, according to research by UBS.
The Swiss bank expects the Chinese currency to potentially break through the 7 per US dollar mark – from 6.80 – in the coming months and finish the year at 6.90.
“Historically a weak [yuan] was accompanied by subdued China share market performances perhaps as a depreciating yuan was typically associated with concerns around economic growth and capital outflows,” James Wang, head of the lender’s China equity strategy, said.
“While the China share market has already declined significantly this year, historically the share market could rarely sustainably rally when the exchange rate was depreciating sharply.”
Dollar-Yuan Exchange Rate
Wang said transport, banks and materials stocks had a higher share price correlation with the dollar-yuan exchange rate, perhaps as those sectors are more affected by general economic conditions.
The sectors most insulated from the currency moves include energy, telecoms, healthcare equipment and retailing, Wang added.
For other companies less affected, such as healthcare and hardware technology suppliers that should benefit from a lower yuan given their higher overseas revenue exposure, this did not always translate into better share price performances.
Wang said another avenue where a depreciating yuan could lower stock value is via unhedged foreign debt on the balance sheet.
- George Russell