The People’s Bank of China has weakened the Yuan to a low rate. In the past this may have been seen as a stimulus to rekindling Chinese growth; but the problem this time is that there are enough concerns about the weakness of the economy – markets are concerned that China’s central bank is seeing data that justifies the need to weaken the Chinese currency. We have seen weak PMI surveys, with the manufacturing PMI weak today, and we saw a weak US PMI in Chicago last week. There is general concern that the economy could be slowing down and China is both leading and reacting to this.
Concerns of weaker data from the Chinese economy are real. The economy is the middle of a restructuring phase and it’s moving towards a domestically-focused, consumption-led economy. There is also an excessive amount of debt in the banking system and the first lending cycle in emerging economies tends to end in difficulty.
For an overall outlook on equities, it’s too early to tell whether a bad start to the year can be a sign that 2016 will be problematic. However it is true that leadership of markets in recent months has been narrow with a number of large cap stocks leading the way. Central bank stimulus has been less effective and together with fears of rising interest rates in the US could mean that this year is more difficult for markets.
