Share Prices & Company Research

Press Release

17 July 2018

Concerning China’s currency …

With Brexit and the prospect trade wars dominating headlines, it seems to have gone relatively unnoticed that the Chinese Renminbi has suffered sharp falls recently. Joel Dungate, Investment Analyst, examines its trajectory, and the ups and downs of China’s markets over recent years.

“The Chinese currency slumped 3.3% against the Dollar in June in what was its worst month ever. The Renminbi had held up strongly in the first part of the year, when many other emerging market currencies had seen sharper falls, but now the currency is devaluing not just against the greenback but against the broader currency basket that the central bank sees as its key benchmark.

“This Chinese currency weakness is reminiscent of 2015/16, when Chinese stock markets suffered dramatic falls, sending markets worldwide into turmoil. However, the fallout this time has not been so dramatic, in large part because Chinese equities are not considered to be in the ‘bubble’ territory they were in a few years ago. Furthermore, there was in 2015/16 a greater sense that the People’s Bank of China (PBoC) had lost control of its currency, as it spent about US$1tn in foreign currency reserves in an 18-month period in order to curb the decline.

“This does raise the question though: what is the reason for the current devaluation in the Renminbi and what is the PBoC’s strategy? In the past, of course, the central bank has sought to intervene in its currency markets in order to deliberately devalue its currency and provide a competitive advantage for its exporters. Could it be that the PBoC is pursuing a similar policy in light of the recent trade war threats sparked by the actions of President Donald Trump?

“This recent Chinese currency weakness is unlikely to allay any fears in the mind of President Trump that China is not playing fair. This theme was a major part of Trump’s 2016 election campaign, even though, by that point, China had switched its policy to one of supporting the Renminbi to prevent capital flight. However, many economists remain of the opinion that China requires a stable currency in order to avoid mass capital flight and, therefore, any attempt to deliberately devalue its currency would prove counter-productive. Some of the Renminbi’s losses were recovered earlier in the week, which traders attributed to state banks aggressively buying the currency. Furthermore, earlier this month, Governor of the PBoC Yi Gang sought to stabilise the markets by attributing Renminbi weakness to the strong Dollar. He said that China “must persist with” its policy of allowing supply and demand to drive the exchange rate.

“On the other hand, some economists are arguing that the PBoC is happy to tread a middle path, allowing the currency to drift steadily lower, perhaps intervening on occasion to stabilise the Renminbi as it appears to have done in recent days.

“Apart from the fact that the central bank does not have a lot of ammunition in a fight to arrest the fall in the currency, there are several short-term advantages to such a devaluation. A falling currency boosts liquidity and supports exporters during a period when Mr Trump is seeking to impose tariffs on a raft of Chinese goods. In the longer term, however, it seems unlikely that the PBoC won’t support the Renminbi, having learnt the lessons of 2015/16 the hard way.”

Ends

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Concerning China’s currency …
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