Monday, August 26, 2013

The emerging market that seems to have sailed under the radar

South Africa 

=  BRICS, the most important group of emerging markets and their currencies. 

In May 2012 the Wall Street Journal reported that the Russian Rouble had fallen to its lowest since 2009 financial crisis levels. That was on the back of falling oil prices and what was then a fresh round of Euro zone sovereign debt concerns. Since then the Russian currency has weakened further, this time because the probability of Fed tapering is having a detrimental effect on all emerging market currencies. This is due to an unravelling of investment in these countries, investment that began in the search for yield when the US began to stimulate its economy by effectively printing money through Quantitative Easing (QE), making US bonds more expensive. This had the effect of reducing their yields. Now, in response to QE tapering expectations, these flows are reversing, in favour of the US currency unit.

Some emerging countries are finding it difficult to deal with the resulting outflows, and the depreciation of their currencies that has followed. India and Brazil, in particular, have felt it necessary to take strong emergency measures to attempt to boost the value of their units. The South African rand is also affected, steadily weakening in concert with its BRICS counterparts.

But there is one exception: As is normal, there is very little movement in the value of the Chinese Yuan, or renminbi, against the US dollar, and whatever movement there is is at the discretion of the Chinese monetary authorities. China has long been using its overseas earnings to pin its currency to the Greenback in an artificial manner. This is not an ideal situation for its competitors for global export business, and in particular those in the US itself.

Despite its embracing of capitalist principles, albeit in the context of centralised non-democratic government power, a legacy of its communist history, China has remained to a relatively large extent insulated in terms of the transparency of its financial, monetary and business cultures. A hiccup in relation to any of these, particularly if they come to western attention unexpectedly, will have very serious consequences indeed.

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