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China’s Currency Struggles Spell Trouble Across Emerging Markets

Just months ago, the Chinese yuan was reigning supreme as emerging markets’ own haven asset, shielding investors from the turbulence of war and runaway inflation. Today, it’s turning into a threat. As growth sputters in the world’s second-biggest economy, its currency has tumbled to a two-year low and looks set for further losses. That’s pushing Goldman Sachs Group Inc. to SEB AB to predict shock waves not just in China’s neighborhood but as far away as Africa and Latin America — with a cheaper yuan hitting other nations’ export appeal and sparking competitive devaluations.

“With the yuan set to weaken further, other emerging markets will face downward pressure on their currencies,” said Per Hammarlund, the chief emerging markets strategist at Skandinaviska Enskilda Banken AB. “The impact will be felt the most by nations which compete directly with China on exports.” The yuan declined for a sixth consecutive month in August, capping the longest losing streak since the height of the US-led trade war in October 2018. It will fall even more and cross the psychological mark of 7 per dollar this year, banks including Societe Generale SA, Nomura Holdings Inc. and Bank of America Corp. say.

Goldman and Societe Generale say the weaker yuan could pull the South Korean won, Taiwanese dollar, Thai baht, Malaysian ringgit and South African rand down with it. SEB sees the Mexican peso, Hungarian forint, Romanian leu and Turkish lira as the most vulnerable. “Trade and financial linkages have significantly strengthened between China and other emerging markets, prominently over the past decade,” said Phoenix Kalen, the head of research at Societe Generale. “These deeply embedded relationships render the situation much more difficult for global emerging-market currencies to decouple from China.”

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