China likely to continue to dominate global markets in early 2017, says Commerzbank

Admittedly the Emerging Markets can often be a heterogeneous mix. It is nonetheless true that at present one question now arises for all of them, and that is how they will be dealing with the new Fed environment.

China is a good example of how difficult that can sometimes be. A glance at the Chinese financial markets does not bode well this week. The stock markets have collapsed by almost 4%, yields for 10-year government bonds continue to explode. The situation on the money market is no different: the interbank rate in Shanghai has reached the highest level in more than one year. And then there is the currency.

At levels around 6.95 USD-CNY levels are as weak as they last were in 2008. There is now increasing uncertainty whether China will manage to stabilise its currency against the background of continued capital flight (how China is trying to regain control of that is described in today’s Week in Focus). The government is increasingly struggling to keep the show on the road.

On the one hand the government wants to reduce the risks that have accumulated (overheating of the property market, high debt levels amongst companies and investors, rising numbers of non-performing loans in the banking sector). On the other hand it has to prevent the local market from suffering too notably thus fuelling capital flight even further.

The aggressive Fed and the strong USD are not exactly what Beijing had been hoping for in this context. The strong USD makes CNY seems weak even though that is not really the case. In fact, the CFETS exchange rate index was able to rise this week.

The central bank controls this currency basket. However, many market participants are still keeping an eye on USD-CNY levels, and the latter are likely to continue their rise. As was the case this year news from China may well continue to dominate the markets in early 2017.