Last week the renminbi reached its highest level against the US dollar in 19 years. Since mid-2005 USDCNY has been on a controlled decent from a fixed position around 8.2765 to its low of 6.1307. If not for the intervention of Beijing the decrease would have been more of a collapse. However, is the renminbi still undervalued?
From a fundamental perspective the Chinese currency is more fairly valued now than it was a decade ago, but many people argue that if allowed to float freely the currency would face more of a revaluation to the upside and at its current value it unfairly benefits Chinese exports. While we don’t think there would be an immediate mass flood into China’s currency if it was allowed to float freely, we do think it will continue to appreciate from here, even under the watchful eyes of the Chinese government.
The renminbi is an attractive investment and an answer to the limitations of investing in mainland China. Investing in the largest trader in the world is hard due to regulations preventing overseas investors from entering the Chinese market, but investors can purchase the renminbi. It is a low volatility investment with potentially a lot of upside.
As Beijing works to make the renminbi more of a global force it’s creating a more attractive investment. By expanding trade settlement in the renminbi and currency swap lines, CNY multiplies its global presence. At the same time, the government allowed the launch of China’s second offshore renminbi fund.
Arguments against a continued renminbi appreciation generally centre on slowing growth in the world’s second largest economy. However, China’s growth slowdown is more of a controlled descent than a deterioration of economic confidence, which reflects the underlying strength of China’s economy. This is causing Beijing to tighten policy as the rest of world pursues expansive monetary policy. Also, China’s switch to a more domestic demand focus economy should support the yuan as imports skyrocket.
On the whole, as Beijing loosens its grip on its currency and CNY becomes more of a global currency the renimnbi may continue to grind higher, but this will be weighed against possible USD strength.