China's stronger stance on yuan brings relief to emerging markets

China's more assertive stance in supporting its markets has provided a sense of relief for assets in developing countries, which have been under pressure due to concerns about the global economy's second-largest player.

After enduring a nine-day streak of losses that began in April of the previous year, emerging-market equities experienced a rebound. Chinese stocks surged during late Asian trading, shortly after Beijing strengthened its defense of the currency. This development bolstered sentiment towards other risky assets.

Currencies such as the South African rand and South Korean won, which had been adversely affected by recent declines in the yuan, led the rally on Tuesday.

However, it's unclear how long the reprieve will last. Strategists suggest that China's measures to stabilise the yuan are insufficient to arrest its devaluation, as the lack of any meaningful initiatives to promote consumer spending and a raging property sector crisis further erode investor confidence.

Concerns regarding China's economic slowdown and expectations of prolonged higher interest rates by the US Federal Reserve have contributed to the most significant August sell-off in years for emerging markets.

Bloomberg quoted Piotr Matys, a currency analyst at InTouch Capital Markets in London, as saying: "The rebound in Chinese stocks provides emerging markets with some respite. But concrete measures from Beijing are needed to address structural issues in the Chinese economy, which are a major source of concern for investors to anticipate sustained improvement in risk appetite."

China has implemented measures to curtail offshore funding, resulting in increased costs for speculators attempting to bet against the yuan. Additionally, the country set a new record for the currency's reference rate, surpassing initial predictions.

On Tuesday, the People's Bank of China fixed the daily exchange rate at 7.1992 per dollar, notably lower than the Bloomberg survey average of 7.3103. This marked the most significant deviation since the inception of polling in 2018.

Furthermore, while several traders attribute the sudden surge in Chinese equities to technical factors and a lack of new catalysts, discussions about state-backed fund purchases have also been prevalent.

Moreover, the BRICS meetingin Johannesburg isfocusing on reducing dependence on the US dollar. Apart from developments related to the summit, investors are eager to gather insights into the global interest rate trajectory from central bankers at their annual gathering in Jackson Hole, Wyoming, later this week.

(Inputs from Bloomberg)

WATCH WION LIVE HERE