There is no doubt China has investors scared for their portfolios after the country devalued its currency not once, not twice, but three times in as many days this week.
What is in doubt, however, is just how scared they should be in the wake of such moves to stoke growth in the world's second-largest economy.
Clearly, those with a penchant for resource stocks have a lot to lose from an extended Chinese economic slowdown, but the impact of an ongoing slump and lower value for the yuan is far more nuanced when it comes to other equity sectors. It may even prove less of a burden than this week's market selloff anticipates.
“We'll have to see how it shakes out,” said Douglas Porter, chief economist at BMO Capital Markets. “The question is whether this is a modest adjustment or the start of a prolonged decline in the currency. I lean more towards the latter, but if I'm wrong, all bets are off.”
Porter believes the devaluations are a defensive measure by the People's Bank of China to offset some of the pronounced strengthening in the yuan, which has matched the rise in the U.S. dollar over the past year.
But the PBOC's actions this week only reverse a tiny fraction of the Chinese currency's recent strength and many global currencies including the Canadian dollar remain well down in comparison.
As a result, Porter said the devalued yuan makes China more competitive on the world export market, but only just slightly. Likewise, importing into China is only a little bit more challenging than it was a week ago.
“It's an added competitive challenge, but nothing too serious just yet,” he said.
Nick Exarhos, an economist at CIBC World Markets, said the health of China's economy is a major factor for investors to keep in mind.
A further slowdown would curb China's appetite for raw materials, as well as hinder the sale of other goods and services into the country such as engineering services, aerospace products and machinery.
On the flip side, Exarhos points out that a cheaper yuan helps Canadian manufacturers with operations in China, because it lowers the effective expenses being paid in the country.
But, like Porter, he said it's important not to lose sight of the fact that the yuan is still roughly 15 per cent stronger versus the Canadian dollar over the past year, even after its most recent move.
In other words, Canadian manufacturers remain competitive based on the loonie's current value.
That could change if the yuan continues to drop, making Chinese exports cheaper, but even then, it's not clear how much that would hinder Canada's exporters, said Darren Sissons, a managing partner at Portfolio Management Corp. in Toronto.
“For Canada, a slower China will be easily offset by a strengthening U.S. economy as that's where the lion's share of our exports go,” he said. “The yuan devaluation is more opportunistic and strategic than crisis driven. It will increase competitiveness of China's exporters vis-à-vis Japan, Korea, Taiwan and to a lesser extent Indonesia.”
Earlier this week, David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., analyzed China's principal exports and compared them to other countries with a similar composition.
He found that China's main exports are electronic equipment, machinery, plastics and steel products, which leaves Germany with the “the most vulnerability by far” should the yuan drop further, followed by Italy, France and the Netherlands.
India and Turkey's clothing makers are also vulnerable to a cheaper yuan, while Mexico's furniture, machinery, automotive and electronics industries might lose out.
Japan, Singapore and the U.S. are also susceptible, he added. (Canada is not mentioned.)
Overall, Rosenberg believes the market's angst regarding China's currency devaluation is overblown and that it's not a repeat of 1994 when the renminbi fell 33 per cent to touch off the 1997 Asian Crisis.
“It doesn't mean we aren't ripe for a market correction and we are in the middle of one right now anyway,” he said. “But if you are market-bearish, please, don't make the renminbi your primary reason.”