(Bloomberg) — Global investors have little faith in China’s success in propping up its financial markets, expecting that mounting economic pressures will drive the yuan’s offshore exchange rate to historic lows.
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The value of the internationally traded yuan is expected to drop to 7.6 per dollar before the end of the year, according to the median estimate of 455 respondents to the latest Markets Live Pulse survey. This would mean a drop of 4% from Friday’s close of 7.29 and would be a record low for the foreign currency.
Underscoring the country’s downward outlook, only 19% of respondents plan to increase their exposure to China over the next 12 months, while 24% plan to reduce their holdings. This is a shift from March, when 25% of investors said they would boost exposure.
Beijing has stepped up its efforts to halt the collapse of the country’s assets in recent days. The authorities urged financial institutions to buy stocks and the yuan, made it more expensive to sell the yuan abroad through higher financing costs, and asked mutual funds to stop selling stocks. On Sunday, officials announced plans to lower stamp duty on stock trades and slow the pace of initial public offerings.
While previous efforts briefly lifted markets, foreign funds continued to sell at a record pace amid concerns about China’s struggles with low prices, a slumping real estate market and rising local government debt. Wall Street analysts have also become more pessimistic, with Morgan Stanley and Goldman Sachs lowering their targets for Chinese stocks last week.
China’s easy monetary policy at a time when the rest of the world is tightening is adding pressure to the yuan, as investors turn to higher-yielding US assets. Two-year US Treasury bonds yield nearly three percentage points more than their Chinese counterparts, the largest premium since 2006.
“The central bank’s policy response to support the yuan has not been and will not be effective in changing the direction,” said Keung Seung, a strategist at Societe Generale in Hong Kong.
And unlike in 2008, when China launched massive spending programs to boost growth, few expect the country to launch large-scale measures this time to save the economy. Only 11% of MLIV Pulse respondents expect policymakers to unveil “bazooka-like” incentives, with the majority expecting moderate measures targeting specific industries. Another 32% said any bailout would be too little, too late.
While the authorities issued many statements in support of the economy, specific actions were limited. During his presidency, Xi Jinping sought to end the reckless, debt-fueled expansion that characterized the years after the 2008 stimulus drive and fueled rapid economic growth.
Read more: Don’t Go Cold: Why Xi Jinping Lets China’s Economy Collapse
“Things are coming,” David Lovinger, managing director at TCW Group Inc, said on the stimulus. “But there seems to be an internal debate about what you need to do in the short term without losing sight of your long-term policy goals.”
And while US President Joe Biden has described China’s economic problems as a “time bomb” for the world and Treasury Secretary Janet Yellen as a “risk factor” for the United States, investors see proliferation risks as limited for now.
About 31% of respondents to MLIV Pulse said the MSCI China index would need to drop another 20% in the next month to trigger a global downturn, while another 33% said losses in Chinese stocks would not lead to any major contagion.
Similarly, the majority of market participants – 56% of respondents – said that a slowdown in China will not have a significant impact on the actions of other major central banks such as the Federal Reserve.
Because major economies have limited export and banking exposure to China, “China’s debt-induced economic downturn is unlikely to lead to another global financial crisis of the sort that occurred in 2008,” write economists at Wells Fargo & Co., including In it Jay Bryson, in a note.
The MLIV Pulse survey of Bloomberg News readers is conducted on the platform and online on a weekly basis by the Bloomberg’s Markets Live team, who also runs the MLIV blog. This week, the poll asks if the 10-year Treasury yield of 4.5% will flood the stock market. Share your opinions here.
(Updates to add the latest support measures in the fourth paragraph.)
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