Renminbi is still a one-way bet
Updated: 2013-05-11 05:51
By Andy Seaman(HK Edition)
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A few days ago the renminbi hit a 19-year high to close at 6.1707 per dollar in Shanghai. This is against a backdrop of growth that is slowing a little from the recent boom years. Yi Gang, director of the State Administration of Foreign Exchange and deputy governor of the People's Bank of China, commented during the National People's Congress that the renminbi exchange rate is closer to its equilibrium. However, all the signs are that the appreciation will continue, as the currency gets more international use and global investors increase their holdings, especially with the mainland tightening monetary policy while the rest of the world is still loosening.
First, the Chinese mainland accounts for 11 percent of global GDP. It is the largest trading economy having overtaken the US with 10 percent of world trade, and accounts for 9 percent of global foreign direct investment. As a portfolio investment destination, most investors are underweight on the mainland, largely due to the low weight it has in indexes.
This is especially true for fixed-income investors, as indexes such as the JPMorgan Global Bond Index for emerging markets have no weighting for the mainland at all. Part of the reason for this is that at present, many investments on the mainland are not available to international investors due to controls. However, the currency is investable, and has provided a steady return to investors with extremely low volatility. The volatility of the renminbi is only a tenth of that of the Australian dollar and the Brazilian real, for example, due to the managed band around the central fixing in which it is managed.
According to World Bank's 2011 estimate, the renminbi is still extremely undervalued, with purchasing power parity estimated at around 4.19, versus the spot rate of 6.23.
The mainland also continues to work towards expanding the role of the renminbi globally. Trade pricing and settlement is one area where they have made great progress, with 12 percent of the economy's trade settled in renminbi by August 2012; this is expected to increase to 30 percent by 2015. Currency swap lines have been introduced with central banks in many countries and regions to facilitate settlement. These include Taiwan, where 46 domestic and foreign banks now offer renminbi products and services, Brazil, Singapore and many other trading partners. Both the UK and France are in discussions about swap agreements. Australia recently set up direct foreign-exchange trading between the Australian dollar and the renminbi, without going via the dollar. London, Hong Kong, Singapore and Taiwan are all major centers for offshore renminbi deposits. According to SWIFT (Society for Worldwide Interbank Financial Telecommunication), renminbi payments grew by 171 percent between January 2012 and January 2013, and the use of the currency is larger than the Danish krone, the New Zealand dollar and has recently overtaken the Russian rouble.
Moreover, the mainland is gradually shifting from an investment-driven economy to a consumption-driven growth model. It now has the largest number of 246 million active smartphones in the world, having overtaken the US. Another interesting trend is that consumers are splashing out on diamonds for their weddings in big cities. By 2011, the mainland had become the second-biggest diamond market after the US, with annual sales of $9 billion. By 2012, 80 percent of couples getting engaged in Shanghai and Beijing bought diamond engagement rings.
Undoubtedly, growth in China will slow from the boom industrial years, as first quarter GDP growth unexpectedly fell to 7.7 percent. However, China has strong parallels with Japan from the 1970s to the 1990s, when growth slowed gradually but the yen continued to appreciate for 28 years. The People's Bank of China is likely to follow a very similar course as Japan. We are now seeing the beginning of this tightening and the consequent currency appreciation, which will be combined with ongoing liberalization of the renminbi.
All in all, I still see the renminbi as a one-way bet. It will continue to grow in global importance, and also appreciate in 2013, even though the country's growth will be slower.
The author is a fund manager at London-based fixed-income fund management firm Stratton Street Capital.
(HK Edition 05/11/2013 page6)