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Why the Yuan Devaluation Does Not Erode China’s Long-Term Investment Potential

Nick Niziolek

The devaluation of the yuan this week has roiled markets, but our overall long-term thesis about China remains intact. Our team continues to identify a range of long-term opportunities in China, including potential beneficiaries of:

    1. Secular growth trends, such as the rise of the emerging market consumer
    2. An eventual inclusion of the yuan into the International Monetary Fund’s special drawing rights reserve pool, a goal which China is determinedly pursuing
    3. The country’s “One Road, One Belt” development initiative, a massive infrastructure build-out that should extend China’s geopolitical influence throughout Asia

We believe recent actions by the People’s Bank of China (PBOC) are in line with our view of China’s long-term geopolitical strategy of strengthening its status as a global superpower. More specifically, the devaluation should advance China’s bid to internationalize the renminbi. As we noted in our May 29 blog, we expect these geopolitical aspirations to provide long-term economic growth tailwinds and produce an expanding opportunity set for investors.

While we are less likely to see a Mario Draghi “whatever-it-takes” or Hank Paulson “bazooka” moment designed to allay market fears, we believe the Chinese government will continue to work around the margins to stabilize growth. As we look to the weeks and months ahead, we expect policy to remain accommodative and additional targeted stimulus measures, further stabilizing the gradual deceleration in growth and economic transition. We also expect the central bank to intervene to reduce market volatility, if required.

While some investors may view the lack of more aggressive stimulus as a concern, weighing on global economic growth, we view this measured approach as longer-term positives for China, particularly when viewed in combination with the country’s commitment to internationalize its currency and solidify its place on the global stage. We maintain our belief that a hard landing for China’s economy is still not the most likely outcome.

In our July 10 post we discussed our view of China’s market downturn, highlighting that while there were segments of overvaluation—particularly in the A share market dominated by local investors—there were other areas of the market that were less richly valued, including many companies with attractive growth fundamentals.

Our approach has been and will continue to be to maintain a disciplined valuation approach guided by fundamental research. As long-term investors, we expect to use short-term market pullbacks to capitalize on the bottom-up growth potential we see, consistent with our identification of long-term top-down tailwinds.

Past performance is no guarantee of future results The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

Chinese A-shares are shares in mainland China-based companies that trade on Chinese stock exchanges such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange. A-shares are generally only available for purchase by mainland citizens; foreign investment is only allowed through a tightly-regulated structure known as the Qualified Foreign Institutional Investor (QFII) system. (Investopedia)

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