What about further devaluation of the RMB?

Rumors of further devaluation of the RMB Yuan

This week in Beijing I was told of rumors (as I call it) of a further devaluation of the RMB (Renminbi) Yuan, some 17% in a few years. I was asked about my opinion. Some American politicians have been attacking China since long, accusing China of currency manipulation (their currency is “undervalued”). I mostly disagreed with that for many reasons. Well, firstly many U.S. companies got rich by importing enormous amount of products for the consumers. If the RMB would go up, that would be bad for them. Just look at how many billions USD Walmart imports every year from China. The reality is, market forces are dragging the currency down, showing its real market value.
They complain China devalues the currency to favor exports. While this might help a bit, this advantage has since a few years mostly disappeared.

The RMB is losing ground recently

The RMB has become weaker indeed. Reasons? Economists will have many explanations but I stick to the sings that capital has been flowing out, by Chinese companies going on a buying spree, by Chinese people feeling uneasy about the state of the economy and politics and taking their money to “safer heavens”. China is now trying to clamp down on all those illicit capital outflows. Yes, the economy is also under stress and that does not help the currency.
With the pressure on the RMB China has now rather started to defend the RMB

Why a further devaluation of the RMB is not so evident

See here a recent comment in the SCMP, recommended to explore as it details the arguments.
07 November 2016 – Macroscope by David Brown
“Why China’s yuan is poised to be the next global super-currency”
With dominant reserve currencies like the dollar and the euro in decline, the yuan has a great opportunity to be a serious contender

I quote:

It has only been a short while since the yuan was granted reserve currency status by the International Monetary Fund late last year, so it is still early days. The yuan’s inclusion in the IMF’s basket of reserve currencies, as recently as last month, means it will take some time before China emerges as one of the leading players in the global payments and reserves system.
To reach true reserve currency status, the yuan must meet three key criteria – cementing credibility, convertibility and confidence in the currency. It will be challenging but not impossible. Governments and multinational institutions must be certain China’s currency not only satisfies these conditions, but it is also backed by credible and transparent policies, in order to feel safe about diversifying their foreign exchange reserves in any significant size into yuan.

And here my comments I posted:

Some good points made. The Yuan has a long way to go but the outlook is rather favorable as other currencies have lost their luster, as explained here. In Beijing some Chinese “economists” predict the yuan will devalue by 17% within a few years. That is better than what some pessimists predict (free fall due to debt and other) but I am more hesitant. China is actually trying to defend the currency as to improve its image as a world currency. Devaluation to help exports is also questionable today. A fact is the yuan is under pressure so the government will have to do something and not let “market forces” act too much. So what will happen? Difficult to say but I would rather opt for under 10% rather than 17%.

What are the main risks in China?

Opinions differ.
Some see the debt burden as a doomsday scenario, the economy will totally collapse.Z
I am not so sure about that, yes debt is a problem but the government has more control than any other country.
More alarming is the real estate bubble. The government is trying to contain it but it is not sure they can succeed. The reason for the bubble are diverse and merits a separate analysis.

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