Equities may shake off yuan depreciation

Recovery appears possible as currency seen stabilizing at a reasonable level to the US dollar

Although a depreciating yuan has taken a toll on the Chinese A-share market over the past two weeks, a recovery appears possible as the local currency is expected to stabilize at a reasonable level to the US dollar soon, market insiders said.

The central parity rate of the renminbi weakened 340 basis points to 6.6497 against the dollar on Tuesday, hitting a new low since August 25, 2017. The currency closed at 6.6336 on Friday.

"The A-share market slump in the last two weeks was related to the fluctuating foreign exchange market," said Li Xunlei, chief economist of Zhongtai Securities.

The China-US trade tensions and the nation's deleveraging moves could have also affected the stock-market sentiment, Li said.

"Many investors might interpret the falling yuan as a sign of an economic downturn or decreasing trade surplus," said Li.

Last week, the benchmark Shanghai Composite Index fell by 3.52 percent to 2747.23 points. Prior to that, in seven trading days to Tuesday, the index fell 3.56 percent.

The Shenzhen Component Index closed last week 4.99 percent lower at 8911.34 points, while the ChiNext Index, which tracks China's growth enterprises board, fell by 4.07 percent to 1541.31 points.

Stocks of real estate firms tumbled 3.9 percent in the seven trading days to Tuesday as a weakening yuan raised fears of capital outflows that could weigh on asset prices.

Airline shares also plunged 10.3 percent during the period on concerns a weakening yuan could bode ill for those companies (as they have dollar-denominated debts to repay) and push up their fuel costs as well.

Li said the domestic stock market will recover soon as China's economic fundamentals are better than in 2015 and 2016. Also, the nation's ongoing deleveraging efforts have achieved good results; and the economy is steady and improving.

"With higher economic quality, increasing foreign exchange reserves and reasonable inflation level, the yuan is expected to be stable at a reasonable level between 6.5 and 7 (to the dollar)," said Li.

Yi Gang, governor of the People's Bank of China, said on Tuesday that recent fluctuations in China's foreign exchange market were largely due to a stronger US dollar and external uncertainties.

"International payments were stable, and cross-border capital flows were roughly balanced," Yi said in a statement published on the PBOC's website.

"China will continue to implement prudent and neutral monetary policy to keep the yuan basically stable at a reasonable level."

The central bank's Deputy Governor Pan Gongsheng also said on Tuesday in Hong Kong that China has ample foreign reserves and foreign exchange tools. China is confident of keeping the yuan stable in a reasonable range.

Dong Dengxin, a finance professor at the Wuhan University of Science and Technology, said the positive remarks of China's central bank governors should shore up investor confidence－more so because China's A shares appear to have bottomed out.

"The current valuation of the A-share market is at a relatively low level, so it's a good time for medium- and long-term investments," said Dong.