October 2015

RMB depreciation – a trend or not?

Fluctuations in the  exchange rate of the Renminbi (RMB) is a main concern and focus to us in Hong Kong, given China’s economy is inextricably linked with that of ours and the amount of investment we have in the RMB. The sudden depreciation in August was a shock to the markets but we have since saw some stabilization in the RMB. Check out the latest market insights shared by PineBridge Investments to examine whether further volatility in the currency is expected.


The following article is provided by PineBridge Investments:

The concerns of a hard landing, structural devaluation and an impending currency war following the People’s Bank of China (PBoC) in August to devalue the RMB were overblown. Although the move was a shock to the market, China’s currency has strong fundamentals and remains resilient, the hardest hit will be emerging markets and Asian currencies.

Market concerns overblown

The RMB depreciation, followed months of negative headlines about China’s economy, which created a lot more noise and investors reducing their China exposure and becoming extremely bearish. Ultimately though, we do not believe that China is heading for a hard-landing or a crash.

The weakening RMB is not going to help China’s exports significantly, in our view.  Nor is it going to materially affect the corporate credit profiles. Nevertheless, the move does suggest the growth momentum in China has slowed faster than what the policy makers would have liked.

In terms of the impact on offshore markets, Chinese dollar bond issuers generally have relatively low sensitivity to currency depreciation. But this latest move will add even more pressure to emerging market and Asian currencies, especially those which are more sensitive to commodities prices.

The move was part of the process to internationalise the RMB, which has come a long way since an offshore market was created for the currency in 2003. Its use overseas has accelerated in recent years, with the balance of offshore RMB deposits reaching RMB2 trillion (US$320 billion) at the end of 2014, according to the PBoC1.

Internationalisation of the RMB

The growing importance of the RMB reflects China’s increased significance in global trade: it is now the fifth most used currency in trade payments, as well as the ninth most actively traded currency according to data from SWIFT2 and the Bank for International Settlements3.

The PBoC is also guiding the currency towards a more market–oriented pricing mechanism. Some commentators have viewed the recent volatility in the daily fixing of the RMB as the prelude to a potential structural devaluation. We do not think this is the case, since the RMB still remains very resilient against other currencies. It depreciated just 4.6% against the U.S. dollar in the year ending 31 August, while G10 currencies on average fell 17% against the dollar over the same period. Emerging markets currencies lost an average of 15% against the dollar4.

While a market-based mechanism necessarily implies higher volatility in the short-term, we believe the RMB will be supported over the medium term by China’s above-average economic growth rate and a strong current account position. 

Remarks:

  1. Source: Internationalisation of Renminbi Report, PBoC, June 2015
  2. Source: SWIFT, 26 June 2014
  3. Source: Triennial Central Bank Survey 2013, Bank for International Settlements 2013, September 2013
  4. Source: Bloomberg data, 31 August 2015

About PineBridge Investments:

PineBridge Investments is a global asset manager with experience in emerging and developed markets, and investment capabilities in multi-asset, equities, fixed income and alternatives.

Disclaimer:

  • The article above is provided for general information purposes only. It does not constitute a recommendation to pursue any investment strategy or take any other action.
  • All investments involve risk. Past performance is not indicative of future results. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.
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