The reform of China’s currency exchange rate regime has been identified by corporate treasurers across Asia Pacific as having the most impact on their business over the last 12 months, according to a J.P. Morgan survey of companies with a collective market capitalization in excess of US$3.2 trillion.
In August 2015, the People’s Bank of China made what it described as a one-off adjustment to the Chinese yuan (CNY) reference rate. Since then, the CNY has depreciated against the U.S. dollar by 7.4 percent, the CFETS index has depreciated by nearly 11 percent and China’s FX reserves have fallen by more than US$460 billion, according to research by J.P. Morgan.
“We have seen a period of volatility since the move last year but we believe the worst is over,” says Muhammad Aurangzeb, head of global corporate banking for Asia Pacific at J.P. Morgan.
“Clearly FX risk is a key concern for cash managers but we are positive on China and the gradual internationalization of the currency. The inclusion of the CNY into the International Monetary Fund’s SDR basket from October is a key testament to the currency’s growing global importance.”
The CNY exchange rate will likely depreciate further against the U.S. dollar to 6.8-7.0 by the end of this year, according to the majority of the respondents in the survey. J.P. Morgan’s forecast is for the USD/CNY to end the year at 6.85.
Most worrying macro-economic issue
The survey also showed that China’s economic slowdown continues to be the most worrying macro-economic issue for corporate treasurers, followed by the direction of U.S. interest rates and emerging markets slowdown.
As the world’s second biggest economy and one that’s long-regarded as a key driver of global growth, China logged its slowest growth rate in 25 years last year, at 6.9 percent. The Chinese authorities are expecting growth for 2016 to be in the 6.5-7.0 percent range.
“This is the second year where China’s slowdown has emerged as a top concern for treasurers attending our forums, and that’s not surprising given the dominant role the Chinese economy plays on the global stage,” says Aurangzeb.
“However, China’s slowdown is primarily due to the economy transitioning from an investment and export-led growth model, to one that is driven by services and consumption. We see that as a positive development as the latter is ultimately a more sustainable growth path for China in the long run.”
Cybersecurity is also area of focus
In the survey, corporate treasurers also flagged cyber security as a key area of focus for their firms, with 21 percent of respondents naming this as their number one concern with regards to technology.
With cyber crime increasing and the subsequent impact it can have on companies and how they operate, corporate treasurers need to prioritize investment into the necessary technology that can help mitigate against this considerable risk, Aurangzeb noted.