Establish exchanges solely for the purpose of trading with China
The carnage in international stock markets and commodities exchanges forces Africans to readjust their views on who will be the continent’s most reliable trading partners for the next fifty years. It is difficult to believe that monetary policy in emerging economies can have any significant impact on exchange rates, so it makes sense to try and find a better explanation for the hammering of emerging market currencies across the board.
It is also unrealistic to believe a single 0.25 percentage point adjustment to short term interest rates in the United States, can shake the financial world as it has done over the past fortnight.
The conservative adjustment to US short term rates was announced in December. At first investors did not flinch with the consensus view being that the normalisation of interest rates was already priced into assets. This may be true but since normal trading volumes resumed following the year-end holidays, the markets have clearly been in turmoil. Can such a small adjustment have such an impact on returns, or is it a new wave of negative sentiment from large institutional investors.?
The other most-punted reason for market volatility and the exaggerated selling, is the slower growth in the Chinese economy. It is true that the Chinese authorities have also embarked on a normalisation strategy, but figures released only last week show the Chinese economy still grew by a very healthy 6.9% in the previous year. I suspect US and European policymakers will gladly sacrifice many of their policy targets if only they can post annual growth above 6%. So I agree with observations expressed at the World Economic Forum meeting in Switzerland that China is far from a hard landing, but is rather entering a re-aligning phase.
Amidst the sharp downturn in asset prices comes a battering of emerging market currencies and of third world bourses. This week the JSE Allshare index is almost 10% down from its lofty 55000 levels earlier last year and it set a fresh low for a one-year trading period, now hovering around 46000 index points. The Rand, after falling off a cliff, has managed to regain some ground, trading at a somewhat stronger R16-50 to the US Dollar on Thursday afternoon. This improvement, however, is relative given that it steadily lost more than 30% of its value in 2015, and then shed some more in the first two weeks of January this year. Even at R12-00 / one US Dollar, I still regards the Rand as undervalued, but would it not have been great if amongst all the turmoil, the currency on which our trade depends, retained its external value.
As an emerging region, southern African countries can only watch in amazement as the market gyrates like a yo yo knowing that there is absolutely nothing we can do about it. But the phenomenon of shrivelling currencies is not uniquely South African and has far more to do with capital movement, than with local conditions.
It is this haplessness when it comes to international markets that I believe will eventually lead to convergence amongst emerging market currencies. The catalyst will probably be the growing profile of the Chinese Yuan. Since so many emerging economies are resource-based and since they all trade significantly with China, it is in our own as well as in the Chinese interest, to develop the channels to grow Yuan-denominated trade. Effectively this will sidestep the need for first converting to US Dollar or Euro, and then to Yuan.
The first tentative steps in this direction came about recently when the Yuan was accepted by the International Monetary Fund to join the US Dollar, the Euro and the Yen in its so-called Special Drawing Rights. Since it is quite certain that China will not require IMF support, it indicates that the Yuan will have to earn its weight in the SDR and the logical way to achieve this is to enhance its liquidity with all its trading partners.
It is difficult to imagine that Chinese trade with Europe will be denominated in anything other than the Euro and the same applies to its trade with the United States. While these two regions account for 80% of Chinese exports, their imports come from entirely different source countries and it only makes sense that these transactions are based in Yuan.
To this effect, a local bank is launching a Yuan currency exchange this Friday. This is a most interesting development and would have been almost impossible a few years ago. However, trade realities, in my view, makes this a necessary next step to relieve us all from undue Dollar and Euro exposure.