Allen Sinai upbeat on China in 2016, says yuan can drop further

(From Korea JoongAng Daily)

“The Chinese government says the movement of its exchange rate is in line with the movements in other Asian currencies, and I agree with this argument,” said Allen Sinai, chief global economist at Decision Economics, “The Chinese currency is overvalued at around 6.59 to the dollar and the currency is estimated to devalue to 7 to 7.25 or even lower against the greenback.”

Allen Sinai

Allen Sinai

The noted economist and forecaster made his comments at a forum hosted by the Institute for Global Economics in Seoul on Tuesday.

Sinai said the Chinese stock market’s plunge since New Year’s Day had nothing to do with actual economic data, but was just a fearful reaction by traders uncomfortable with the lack of transparency from China.

“Traders and investors don’t believe in the numbers reported by China, and in the trading world, there is always a chance that something happens,” he added. “If [it appears like] China’s economy is collapsing, the only thing that traders can do is to sell.”

Even with nothing concrete, the fear about China’s economy and the subsequent volatility can spread to other major countries including Korea, according to Sinai. The decline in the Chinese market led to a 3% sell-off in the Korean stock market.

“If traders sell Chinese stocks [when they believe] there is a chance that the Chinese economy is collapsing, then they would have to sell stocks in Korea, Japan and the United States, because China is the second largest economy in the world with its 1.3 billion people,” he said.

Despite the year’s initial weakness, Sinai remains optimistic about the coming year.

“Traders always overreact in the market when fundamental uncertainty or fear exists. There are lots of risks out there, but at the beginning of the year I hate to be gloomy,” he said. “The United States and global economies will grow with little inflation.”

Sinai said the global economy this year will turn on three important factors: low crude oil prices, the appreciation of the dollar and the advancement of innovative technology.

Sinai said oil-producing countries including the members of Organization of Petroleum Exporting Countries will struggle this year, while countries that import oil will benefit from lower prices.

Meanwhile, if the dollar continues to appreciate it will likely increase the purchasing power of the biggest traded currency in the world and this will lead to raising inflationary pressure. Sinai also said the advancement of innovative technology this year will play a significant role in transforming labor markets.

Categories: Asia Unhedged, China, Koreas

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