JP Morgan’s Haibin Zhu says more devaluation could be on the way

China’s central bank allowed its currency to drop by 1.86 percent this morning in the biggest devaluation of the country’s currency in more than a decade. And the monetary maneuver may have a major impact on global real estate markets.

In explaining its decision to let the yuan slide, the People’s Bank of China said in a statement that it was allowing the currency to be more market driven. However, many analysts interpreted the move as an attempt to rekindle the country’s slowing export sector after GDP growth slowed to 7 percent last quarter and exports continue to suffer.

While the devaluation could provide some assistance to China’s manufacturers, for its institutional investors, real estate developers institutional investors,and wealthy individuals, the decision to let the global value of Chinese assets slide is likely to drive more capital overseas.

With Chinese investment in global real estate already reaching record levels in 2015, the prospect of further yuan devaluation should renew interest in property assets in the US and other countries that could provide mainland investors with a currency hedge.

Letting the Yuan Slide

Chinese insurers such as Ping An and China Life, who agreed to invest in this $500 million Boston project this year, just got a bonus in their ROI

The government’s decision to allow the yuan to appreciate means that the Chinese currency started out Tuesday at RMB 6.2298 to one US dollar, compared to RMB 6.1162 on Monday.

In its statement, the central bank said that the daily “fixing” for the yuan will be based on how the currency closes the previous day, rather than being set by the government. Technically speaking, the yuan, which is not yet fully convertible, is allowed to trade at 2 percent above or below its fixing, which in the past had been set directly by the bank.

With China’s economy slowing in recent months, the PBOC had been intervening to prop up the yuan and keep it from devaluing. The decision to allow the currency to slide against the dollar could reignite fears of a currency war, and is certain to provoke a response from some US leaders who believe that China undervalues its currency to stimulate exports.

The change in policy by the People’s Bank of China to allow the yuan to lose value against the US dollar comes against a backdrop of slowing economic growth on the mainland, and a desire by the Xi government to see the Renminbi become a global reserve currency.

China’s GDP growth slowed to seven percent in the second quarter, and just last weekend data from China’s customs department showed that the nation’s exports had fallen by 8.3 percent in July, compared to the same period in 2014.

JP Morgan Sees Potential for Further Devaluations

Many analysts believe that this combination of forces means that this sudden fluctuation could merely be the beginning of a new era of currency volatility as China allows the yuan’s value to be more market-driven. For its part, the PBOC stressed that today’s move was a one off, but not everyone was convinced.

Haibin Zhu, chief China economist with JP Morgan said in a statement that one potential scenario was that, “Going forward, the PBOC will set the central parity rate based on the closing spot rate on the previous day. Technically, this means CNY will become a freely floating currency.”

The veteran China analyst added that, “Given the current market expectation, we expect CNY will depreciate in the near term in this scenario, and daily fixing will drift up until the market reaches balanced two-side volatility.”

Zhu also pointed out that the PBOC could try to re-establish market belief in the yuan’s stability going forward, without indicating which scenario would be more likely.

Yu Yongding, a scholar at the Chinese Academy of Social Sciences predicted that the yuan was moving into “a period of stabilization or even depreciation” against the US dollar.

Chinese Investors in Need of a Hedge

Even the possibility of China moving into a new era of currency depreciation should motivate the country’s investors to look for investment opportunities overseas as a hedge against newfound instability at home, and an opportunity to improve yields on existing assets.

Starting in 2005 when China did away with the yuan’s peg to the US dollar, the currency has appreciated against the greenback from RMB 8.28 to Monday’s RMB 6.1162. With yesterday’s 1.86 percent reversal of that climb, investors such as Anbang Insurance, which bought the Waldorf Astoria last year for $1.95 billion, just saw at least some of their assets increase in value by nearly two percent.

Following policy changes in 2012, Chinese investment funds including insurers are now allowed to put up to 15 percent of their assets overseas. However, even aggressive investors such as Anbang (which is said to have RMB 800 billion in assets) are still far from reaching this 15 percent ceiling.

But acquisitions by Anbang and its cohort, including Ping An and China LIfe Insurance, are already driving Chinese outbound real estate investment to record levels. According to research by Mingtiandi, if only transactions of $50 million or more are considered, Chinese investors have already put $13.4 billion into overseas real estate this year, with over $3 billion heading to the US.

The recovering US economy has made American real estate more attractive to Chinese investors already, with UK property only attracting $1.65 billion in Chinese acquisitions so far this year, compared to $4.6 billion in all of 2014.

Australian real estate had been a major target for Chinese investment this year as the yuan held steady against the US dollar, and the Aussie currency lost nearly 20 percent of its value against the yuan in 12 months. Today, however, Australian dollar was off by 1.1 percent against the US, in response to the Chinese devaluation.

Should the Chinese currency devalue further, or if concerns should grow about the yuan’s stability, more Waldorf Astoria deals just might be on the way.

Record RMB Devaluation to Whet China’s Appetite for US Real Estate