TOKYO -- The currencies of Australia, South Korea and Brazil -- nations reliant on a healthy Chinese economy -- are facing sell-offs in the market as fear of an economic slowdown in China spreads.
"When China sneezes, Australia catches a cold." So says Tokuhiro Wakabayashi, co-branch manager of State Street Bank and Trust's Tokyo branch, commenting on the Australian dollar's sharp depreciation.
The currency touched a roughly nine-month low against the U.S. dollar last week. The Australian dollar also dipped under 80 yen, marking a year-to-date low.
Stay-at-home orders in Australia have been extended and toughened as the delta variant of the coronavirus sweeps across the globe. And the Chinese slowdown has encouraged the sell-off of the Australian dollar, because the two countries have deep economic ties, according to Wakabayashi.
China's share of Australian goods exports has soared over the past two decades to roughly 40%. Australia's economic recovery would face an uphill battle if Chinese demand for such key exports as iron ore tapers off.
Morgan Stanley recently warned of how currencies of resource-producing countries are being undermined by China risk. It recommends that investors sell the Brazilian real, the Chilean peso and the Mexican peso for the U.S. dollar.
Even resource-poor South Korea's won has traded at depreciated values since last fall. One big reason is that China is the country's top trading partner.
China was the first economy to recover from the pandemic, but evidence is growing that its internal and external demand have slowed considerably.
The official manufacturing purchasing managers index dropped a fourth straight month to 50.4 for July -- just above the boom-or-bust line of 50 and marking the lowest since February 2020, when China's COVID-19 epidemic peaked. Retail sales shrank on the month as well.
The delta variant tore through China in the first half of this month, leading to new restrictions on the public. Chinese economic indicators could soften further in August, according to Matthew Hornbach of Morgan Stanley.
Chinese authorities have clamped down harder on a host of sectors, including technology and cram schools, under the banner of correcting rising inequality. Such enforcement actions have fueled market concerns over a slowing of Chinese growth.
Yet the yuan itself has remained resilient against China risk. For the past two months or so, the Chinese currency has hovered in the neighborhood of 6.5 against the dollar. A massive current-account surplus, along with Beijing leaders favoring a stable currency, have curbed the weakening of the yuan.
Going forward, the focus will be on the depth of the Chinese slowdown and how long it lasts.
"China's fiscal outlays during the first half of the year were more austere than anticipated," said Hiroshi Ugai, a senior economist at JPMorgan Securities. "The economy will rebound in line with fiscal expansion later on."
But further down the road, a declining birthrate and the graying of society will drag down growth. The People's Bank of China, the country's central bank, estimates that the potential growth rate will shrink to 5.1% in 2025 from the pre-COVID figure of roughly 6%.
The trend will adversely affect highly China-exposed countries, weighing on their currencies.