China: The RMB Flunks The Safe Haven Test

| About: WisdomTree Chinese (CYB)

On 1st October, the RMB will become the mushiest member of the SDR: it is NOT a safe haven currency, and it will keep depreciating steadily.

1. Last Week

At the end of July, the Dallas Fed released an interesting bit of research, "Is the RMB a Safe Haven?"

2. Goal

According to Bloomberg's Elena Popina, 25th July, "The report tested the relationship between a gauge of stock market price swings and the value of the yuan against the US dollar, yen, Euro, Pound and the Swiss Franc, currencies perceived as safe exchange rates because their value rises relative to others during uncertainty."

3. "Uncertainty"

This arises when the Chicago Board Options Exchange Volatility Index, or VIX, spikes.

4. Three Conclusions

The report finds that; a) the RMB has NOT been a safe haven currency during stormy times, i.e. when the VIX spikes, the RMB has FALLEN against the other safe haven currencies; b) its currency regime is a "dirty float (when the dual exchange rates were unified on 1st January 1985, the RMB stood at 2.8/$; now it costs 237% more, 6.66/$), and c) the RMB accounts for a tiny 1.7% of global payments.

5. SDR Membership

Nevertheless, as announced on Nov. 13, 2015, the RMB joins the IMF's Special Drawing Rights (SDR) basket on October 1, 2016.

6. Investment Implication

Do NOT buy the RMB if you are banking on it appreciating or being a safe haven currency. Saddled with the burden of having to create 10 million jobs a year, Beijing will want to keep the RMB weak-ish in order to promote the nation's price-sensitive exports.