Morgan Stanley (NYSE:MS) has shifted its stance from neutral to bearish on emerging-market currencies due to concerns over China's growth risks, which not only impact the yuan but also exert further pressure on a globally weak economy. The Wall Street giant's view change partly resulted from a shift in perspective on the offshore yuan, where it has added a short position in expectation of persistent growth risks, according to a note by strategists led by James Lord.
The bank is among several prominent institutions that have recently downgraded forecasts for China's 2023 economic growth, following disappointing data and insufficient fiscal or monetary stimulus. Despite Beijing's intensified efforts to bolster the currency, the yuan has depreciated nearly 6% against the dollar this year, reaching its weakest level since 2007.
Asian currencies, especially the Singapore dollar, baht, won and ringgit are most vulnerable to a slowdown in China's growth, while other emerging market peers including the rupee and Turkish lira may be better positioned, Morgan Stanley strategists suggested. In sovereign credit, Panama, Zambia, Angola and Ecuador could face significant downside exposure to a weakening Chinese economy due to their trade links and bond sensitivity to the offshore yuan's performance.
The strategists do not anticipate a significant rebound in sentiment towards China's outlook in the near term, citing low private-sector confidence, property sector deleveraging and long-term issues ranging from debt to demographics.
However, Morgan Stanley is not alone in predicting yuan weakness. Goldman Sachs Group Inc (NYSE:GS). also foresees an extension of yuan softness due to weak exports, sluggish domestic consumption and deflationary pressures. Yet, Goldman Sachs notes that support measures from the Chinese central bank will moderate the pace of yuan depreciation. They highlighted key market concern about whether a weaker yuan will trigger significant capital outflows. Nevertheless, they pointed out that foreign exchange reserves are high, commercial banks' external assets have been accumulated and the People's Bank of China (PBOC) has tightened capital outflow channels.
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