The Future of the Renminbi

If there has been one sure bet in financial markets over the last few years, it has been on an appreciation of the Chinese renminbi against the U.S. dollar.

The appreciation has been slow but steady. After a few years of managed appreciation, the renminbi was repegged during the 2008 crisis. In response to considerable pressure from the United States, the peg was removed  and the currency was re-'floated' in June 2010. However, the Chinese authorities continue to set the daily closing value and the renminbi has appreciated less than 7% against the U.S. dollar since then. Reputable estimates of the size of the undervaluation are as high as 70% (here), but my read of the 'main-stream' estimate has been about 20-30%.

 

This intervention has caused considerable furor in the United States. It seems like every six months (or is it a year?) there is a bout of political grandstanding surrounding whether the Treasury will be forced by the Senate to include China on their list of currency manipulators, which would pave the way for the U.S. government to impose trade sanctions. Of course, due to the symbiotic nature of the trade relationship between China and the United States, this never ends up happening, but the posturing appears to have started again (here).

The market however, sees things quite differently. The renminbi forwards market is currently pricing a depreciation of the currency against the U.S. dollar over the coming months.

In other words...

The best explanation I can come up with is that the market consensus is waking up to the Jim Chanos version of the Chinese growth story - economic expansion fueled by unsustainable credit growth which is financing enormous investment in overcapacity (here, starting at the 7 minute mark). While the renminbi forwards have moved in a manner consistent with the recent sell-off in Chinese equities and commodities, I was still quite surprised to see this pricing in the forward markets. Any divergence between these asset classes should be closely monitored moving forward.

About Time Somebody Stood up to China

I have long been quite critical of Western nations' unwillingness to stand up to China.  Whether it's currency manipulation, domestic human rights abuses, providing diplomatic and financial support for brutal regimes, environmental degradation, domestic political repression, or an unwillingess to back tougher sanctions on Iran at the UN Security Council, no one seems willing to make any meaningful statements backed up by any action.  To be honest, I am not sure what exactly I looking for, but the lack of backbone that Western countries have displayed in their dealings with China has been cause for shame.

Well finally somebody has had enough of China's shenanigans.  In January, Google reported that they had been the target of a cyber-attack which targeted primarily the Gmail accounts of Chinese human rights activists.  Unsurprisingly, China flatly denied the claims.  After negotiations failed (what exactly were they negotiating?), Google decided enough was enough and announced that, with the intention of providing Chinese users with uncensored search results (something they could not provide at Google.cn), they were redirecting visitors to Google.cn to the uncensored Google.com.hk (Google's Hong Kong based site).  This strikes me as a major loss of face for China and I am sure that they Chinese government will be doing everything they can from this point forward to make Google's operations a nightmare.  I however, applaud Google for standing up to China, and it appears that Google is not alone.  GoDaddy has also recently announced that, in response to cyber-attacks launched from China, they will no longer be registering new domain names in China.  Anyone arguing that the timing of this announcement is merely coincidental has a tough sell.  It seems quite likely that this is a statement of solidarity with Google.  Here's to hoping that other firms follow suit, perhaps forcing China to think twice before applying their usual bull tactics.