China: (At Least) 5 Renminbi Positives

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Includes: CNY, CYB, FXCH
by: Enzio von Pfeil

The end of the world is NOT nigh just because the RMB skidded briefly by under two per cent last Tuesday. When to buy into the RMB's five positives.

1. MORE MARKET-DRIVEN

As the week of 21st August in China points out, People's Bank of China (PBoC) Governor Zhou Xiaochun has made the exchange rate more market-driven: today's rate now is fixed (roughly) at yesterday's closing market rate. This means that the RMB exchange rate reflects more of what the market was thinking.

2. DEEPER DOMESTIC CAPITAL MARKETS

In the South China Morning Post of 18th August, the Business section greets us with the headline, "Devaluation spurs mainland firms to mull domestic debt". HSBC's economists divine that mainland companies have US$1.7 trn of debt outstanding. When the RMB falls, these domestic companies need more RMB to service such foreign currency debt:[1] so much for that hackneyed idea of raising cheap foreign currency debt! Depreciations make it more expensive to service in local currency terms. So, expect deeper domestic Chinese capital markets.

3. DEEPER FOREX HEDGING MARKET

With the RMB becoming more market-driven, volatility will increase. This means that the need to hedge forex exposure will rise. That need will beget deeper currency hedging markets in China.

4. MORE ONSHORE COMMODITY PRODUCTION

According to the Financial Times of 21st August, "A weaker currency raises the cost of imported raw materials, making domestically produced resources more attractive. For China, it could mean a boost for coal, iron ore and aluminium…" local production.

5. NEW GROWTH MOTORS

Chinese government is discovering that the old tools of spurring growth - investment and currency depreciation[2] - just don't work anymore. So it will have to develop new motors in order to spur private consumption, which accounts for about 70 per cent of any economic pie, anyway.

6. INVESTMENT IMPLICATIONS

The RMB will keep gently depreciating[3] in line with greater capital flight and the PBoC increasing the supply of RMB. This increased "excess supply of money" improves China's Economic Time. So, if you like buying cheap shares, then focus on banking (reasons 1-3 above), commodity producers (reason 4 above) and private consumption plays (reason 5 above).

7. TIMING

China is being blamed for the market's current malaise. We think that it will stabilize over the next couple of days, and thus would recommend that you start buying cheap stocks towards the latter half of this week.

[1] In my book with Macmillan Press, Effective Control of Currency Risks, I stress: "Get the right currency - don't get the currency 'right' "

[2] In my most recent book, Trade Myths: How multinationals influence trade balances, I dismember the myth that a low exchange rate boosts exports. Were that the case, we should all be grabbing emerging markets stocks and bonds on account of their currency depreciation ":boosting exports"; however, everyone is shunning these reprobates.

[3] Remember that that stonking "devaluation" of 1.86% (from RMB 6.2097/$ on Monday, 10th August to RMB 6.3250/$ last Tuesday? At the time of writing today, the RMB stood at 6.3974/$ (Bloomberg), meaning that it has been "devalued" by a stunning 3.02% since 10th August. Hardly the stuff of which financial crises are made….