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Will RMB appreciate soon?

Below is Jim O'Neill's latest take on RMB...

China and the CNY. And here is the especially strong view bit.

I have returned with a rather dangerously strong feel that China might be close to doing something of note on the CNY. It has been my rising view since the inflation evidence picked up in early January, that the circumstances were starting to change, and in the weeks before this trip, the evidence has built, and a couple of bits and pieces I have thought through, as well as chatting with some interesting people on my trip, I think something is getting closer. Moreover, contrary to our formal forecast of a 5pct rise of the CNY versus the $ starting in a few months time, I have a hunch that as and when they move the exchange rate, it might involve something different, possibly a one off revaluation followed by a broader band. I emphasise that this might just be what I think they SHOULD do, as oppose to will do, but the two have merged in my jet lagged mind. My guys in the team , are far from sure  that I am anything other than out to lunch….

Why do I think this?  The external "pressure" as such is there as always, and while I generally accept the notion that China won't  like to move when everyone outside is nagging them, there have been a couple of more nuanced outside comments. The RBA " no move" meeting last week and reference to China, is one of them, as well as a slightly more subtle comment from Mr Geithner on the topic. Moreover, the main reason why they would move will be , if it suits them domestically. And it is this which has changed. Inflation - this am's numbers not changed anything -is picking up, and the economy is , if anything too strong. While many argue that Beijing is still troubled by "weak" export growth, exports are clearly on the rebound. A few people I chatted to , make me think that exports are probably rising quite a bit now to the rest of EM, and from a cyclical perspective, if exports were to recover any more, then GDP growth is simply far too strong.( as an aside, look at the staggering import growth of 86pct in Jan trade data) And as one person interested in these matters put it to me recently, " how can we get the CNY out of the daily attention of everyone?" .

The persistent focus on the CNY is clearly complicating monetary policy, and at a time when inflation is becoming a policy issue, they need to try and get rid of it. One way of doing this is to do a decent reval ( say 5pct) and introduce a genuine wider band, or a Singapore style true basket, in which they let it become both more volatile and a creature of other exchange rates for some time. Of course, one of the major reasons against then doing anything, is that if it were to simply attract even more speculation, then it would be counterproductive, but in my judgement, the evidence that the CNY is as undervalued as so many observers still say, is increasingly less clear. ( both our GSDEER and the trend of the trade balance suggest this lazy consensus thinking could be wrong).

As to what would be the consequences of such a move on other markets? Many I discuss it with, think local equities would go down, and this would translate into other regional markets. I strongly disagree, and think the opposite. It would bring the end game of tightening closer to the end, and would be a strong move to support the declared  policy shift to encourage strength of domestic consumption relative to other parts of the economy.

Here's my brief analysis...

First, many people that believe China’s growth model is utterly unsustainable and due for a collapse argue that the RMB has no solid base for appreciation at all, like why does China export steel when it absolutely has no high benefit/cost ratio to do that, intentionally kept low resource prices make the export artificially attractive… it’s a huge game played by the US and want China to set foot on the path of Japan’s lost two decades…

 

Then there is the optimistic type, I’d like to save my ink, and they just believe the sun rises in East will also set here…

 

I’m a bit of both, or none of either, China is not unique, all emerging market has similar issues, undervalued currency for sake a higher export, because their financial system is weak, the only safe guard is high reserve and when people are poor, the only way to get things better is the earn money from the rich…

 

Yes, today, the concept has changed somewhat, China’s consumption saved the day for the first time in 2009, 59% of GDP growth, if you want to use the word inflection point, use it. China will rely much less on investment and export, because investment that creates bubbles has ceilings, export triggers protectionism and over dependent on others…

 

But though the fundamentals are telling you to expect more appreciation, the reality may be different, a once off revaluation now will only reward those speculators who are already at heavy bet in China, and companies rely on thin margins(low single digit on gross margin and heavy reliance on top line growth/operating leverage) will come to realize their doomsday overnight. Plus the on going stronger USD, the pressure for RMB appreciation will be low, not high…



Disclosure: None