China: Again rebuffed from the MSCI benchmark emerging market equity index - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that sentiment is unlikely to be helped in Asia today with the news that China once again was rebuffed from the MSCI benchmark emerging market equity index.

Key Quotes

“On many levels that is hardly a surprise, but it’s still unwelcome timing for China, which is desperate for capital inflows to relieve outflow pressure. So far the primary impact has therefore registered on the currency, with CNY slumping to 6.5970 at the close and CNH well past 6.61: in terms of the onshore currency we are now at a record low in this particular cycle, and the last time we hit this level was back in February 2011. Furthermore, this morning we just saw the first PBOC fixing past the psychological 6.60 level since 2011 at 6.6001 vs. 6.5791 yesterday, so that Rubicon has now been crossed.

As we all know, a weaker Chinese currency tends to portend volatility in many other areas of the market. Indeed, mark well the recent warning from German Chancellor Angela Merkel on a three-day visit to the Asian giant that China is increasingly being seen as an economic rival as it marches up the value-added ladder without wanting to give up the lower rungs. Given this is a potential clash between the two economies running the largest structural current-account surpluses, rather than a net exporter and a net importer like the US, it looks a case of mercantilism vs. Merkel-cantilism. (Hat tip to Richard McGuire for that gem.)”