The markets shook after China let its renminbi currency depreciate, and some Asian emerging markets, along with country-specific exchange traded funds, will continue to feel the consequences of the weaker yuan.
A depreciating yuan makes Chinese exports more competitive in international markets. However, the beggar-thy-neighbor policy will negatively affect the country’s major trading partners.
Daniel Martin, senior Asia economist at Capital Economics, argues that a weaker renminbi could make exports more expensive while a softer economy could diminish demand, reports Steve Johnson for Financial Times.
Consequently, in examining other Asian countries with large exports to China, Martin believes that Taiwan, Hong Kong and Singapore are countries most negatively affected by the depreciating yuan.
For ETF traders, country-specific ETFs, like the iShares MSCI Taiwan ETF (NYSEArca: EWT), iShares MSCI Hong Kong ETF (NYSEArca: EWH) and iShares MSCI Singapore ETF (NYSEArca: EWS), could be in trouble as the countries’ export industries soften. Year-to-date, EWT fell 9.3%, EWH rose 5.1% and EWS declined 12.5%.
Moreover, Martin warned that if China did experience a hard landing, investment growth would also be pressured, and demand for commodities would be hardest hit. Consequently, major commodity exporters that provide raw materials for China would come under duress, including countries like Indonesia and Malaysia.
The two emerging markets are already in a slump. Year-to-date, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) plunged 23.6%, iShares MSCI Malaysia ETF (NYSEArca: EWM) plummeted 20.3%.
“Aside from perhaps Hong Kong, Malaysia stands out as the most vulnerable to a hard landing in China and/or a fall in the renminbi, which helps explain why the ringgit has performed so poorly this week,” Martin told the FT.
Malaysia’s ringgit and Indonesia’s rupiah both dipped to 17-year lows. Since EIDO and EWM do not hedge currency risks, the ongoing depreciation in the two countries’ currencies have dragged on performances even further.
Mirae Asset Management, though, argues that South Korea and Taiwan are the most exposed to the yuan weakness as China accounts for 39% of South Korea and 29% of Taiwan’s exports.
The iShares MSCI South Korea Capped ETF (NYSEArca: EWY) has fallen 11.2% year-to-date.
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article