Edge Capital Research Team
Similar to many countries, China has faced its fair share of economic challenges. The shift away from the old growth model of exports and fixed asset investment towards services and consumption has caused economic growth to understandably decline from high rates in the past. In addition, certain imbalances resulted from government stimulus deployed after the financial crisis. From a financial market perspective, much of this has been reflected in equity market valuation (outside of mainland China exchanges). Combined with confidence that policy makers in China had the tools necessary to manage these complex issues, we held a positive outlook on the broader region’s equity markets – specifically on consumer themes. We maintained our outlook even despite the wild gyrations of the local Chinese equity markets these past few months. However, this week, new information was made available that has caused us to re-evaluate the fundamental risk within the region. Without prior notice, China’s central bank (the People’s Bank of China or PBoC) changed the methodology by which its currency value is set relative to the US Dollar to be more market-based. The result has been a series of daily devaluations of the currency with the PBoC stepping in recently to slow the pace. On the following few pages, we provide our opinion on why this change was made, what the implications could be, and what action may be appropriate. To foreshadow our conclusions, while we still believe the long-term story of the emerging Asian consumer is intact, the degree of risk introduced by this recent change causes us to recommend reducing exposure to the investment theme.