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5 Views On China’s Currency Intervention

Cinthia Murphy
Late last summer, Jim Rogers said he was buying Chinese equity ETFs on dips—his comments made shortly after the Chinese market faced a steep correction amid concerns about slowing growth. By and large, it’s difficult to find a market pundit who is truly negative on China long term, but ETF investors seem to have more mixed feelings.

What was expected to be a one-time devaluation of the Chinese yuan on Tuesday proved to be more than that when China devalued its currency further on Wednesday.

The moves have caught markets by surprise, triggering a conversation about unexpected risks in China, the need for currency-hedging Chinese exposure, and even the possibility of having to bail out of China ETFs altogether.

Markets can react abruptly to surprises as doomsayers are advising investors to run for the exits. We spoke with five ETF advisors who share a more moderate view of the latest development.

Here’s what they had to say:

David Garff, president of Accuvest Global Advisors, a Walnut Creek, California-based firm known for its focus on single-country investing:

The devaluation was a surprise to most market participants. I always felt they would free-float the currency at some point if they want to reach their goal of being another reserve currency. I just didn't expect it to be so quick and such a large devaluation.

Clearly any sort of currency devaluation that is strong and long-lasting is a concern for U.S.-dollar investors, and we need to be aware of what’s going on. Currency moves create more uncertainty, which most view as riskier. I feel the same way.

The risk of a capital flight from China increases as the currency devalues. However, I don't agree with the doomsayers that say that we're in for another 1998 Asian currency crisis.

China has recently dropped in our ranking, mostly due to deteriorating momentum and fundamentals. Now, risks are increasing. So it would not surprise me to see China move even lower next month.

The short answer is that we need to be vigilant. Risk has increased. We have decreased, but not abandoned, our position in Chinese equities. This is another example of why currency-hedged ETFs are a great tool for us.

Mark Dow, founder of Dow Global Advisors and author of the Behavioral Macro blog, has 20-plus years of experience as a policymaker, investor and trader, focused on global macro and emerging markets:

My guess is if China intervenes today, it will be to slow the rate of depreciation, not engineer it. “Devaluation” connotes “disorderly,” but not this time. I can't see anything bearish about these Chinese FX moves, when put in the broader context. In fact, it's a bullish development. Looking backward for parallels rather than focusing on China's context is why so many are coming up with wrong conclusions.

I’m not bullish emerging markets yet. Emerging markets are in a serious bear market, and have been for a few years (2011 for equities, and since the 2013 “taper tantrum” for local currency fixed income). But there are good reasons to believe emerging markets this time around are not going to experience the kind of crashes, deep recessions and defaults they are famous for. Yes, I’m saying it’s different this time.

Among the reasons, most emerging markets now have flexible exchange rates and much higher levels of reserves relative to historical norms. The most spectacular emerging market crises took place inside the pressure cooker of fixed-exchange-rate regimes.

The imbalances built and built and built until they gave way in spectacular fashion, shocking investors and forcing liquidations. Today FX moves are continuous, and the ample reserves can be used to circuit-break and ensure continuous pricing, since they’re no longer needed to defend a peg.

Sean Clark, chief investment officer of Philadelphia-based Clark Capital Management:

A key reason for the yuan devaluation was the devaluation of the rest of Asian currencies against the yuan, such as the Korean won, the Thai baht and the Taiwanese dollar. These countries are some of China’s largest export markets, and the steps China has taken are an effort to stabilize the export part of its economy.

The devaluation of the Chinese currency does not change my opinion of China. From a tactical standpoint, we’re avoiding China and the rest of Asia, except Japan, due to underperforming markets.

We simply like Japan and Europe better on a tactical basis. Longer term, we do still like China and Asia, and expect that region of the world to be the engine of global growth. China in particular, even though growth is slowing, has attractive valuations and friendly monetary policy.

On the macro front, the uncertainty that the PBOC [People’s Bank of China] has injected into the capital markets has lowered the probability of the Fed hiking rates in September. We still think the Fed will hike, but it’s less of a sure thing now.

Tyler Mordy, president and co-chief investment strategist of Toronto-based Hahn Investment Stewards:

Much misinformation continues to plague China. The consensus continues to get the broader narrative wrong. Why should it be any different when discussing the yuan?

Here, the strong consensus is that the recent devaluation is devious mercantilism designed to protect sagging exports. To be sure, these moves, along with China’s recent micromanagement of the stock market, is clumsy intervention. But protecting sagging exports is not China’s intent. Rather, the devaluation is a small step toward allowing the yuan to move toward a more market-based exchange rate regime.

That may sound counter-intuitive, but the currency is being let off the U.S. dollar’s leash. Why shouldn’t it, if the goal is to let market forces dictate its value? All of that is positive, and a necessary step to push ahead the market-oriented reform agenda outlined by president Xi Jinping nearly two years ago.


Blunders will be created in Beijing along the way. But the longer narrative is one of China rising as both an economic and financial power. We are only in the foothills of a long journey.

Shehriyar Antia, founder and lead strategist at Macro Insight Group, a New York-based investment strategy firm. His expertise includes 10 years as a senior market analyst at the Federal Reserve Bank of New York:

It's clear the Chinese economy has been slowing over the last year or so. Growth has not been as robust as it has been in the past. But the strong message I get from this move is this that Chinese authorities have both the determination and the resources to ensure there's not a hard landing any time soon.

Chinese authorities have been pulling on multiple levers over the last couple of months, everything from altering regulations in bank reserves and bank lending, to the trading environment in the equity space. Now they're pulling on the currency lever.

This highlights for me once again that the Chinese authorities have the determination, the resolve, as well as the resources to do whatever they can to ensure a soft landing in China.

As far what some implications may be for the more domestically focused investor, I really don't see that this, as it's currently playing out, is going to influence the Fed in a big way. There's a threshold that would need to be crossed for something abroad to really impact the actions of the Fed.

That threshold is that U.S. financial conditions would need to tighten. So basically that would mean spreads widening for corporates, banks, consumers right here at home. That would be something the Fed would need to pay attention to.

Contact Cinthia Murphy at cmurphy@etf.com.

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