A good summary from the FT – see video below. The Renminbi is permitted to trade 2 per cent on either side of a daily midpoint set by the People’s Bank of China (PBOC). This suggests that the PBOC still has significant control of the renminbi. Basically at 9.15am the Peoples Bank of China (Central Bank) and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate. The midpoint set by the PBOC on Monday of Rmb 6.9225 was the lowest since December, when trade tensions were last at fever pitch. The PBOC blamed the tariffs and trade protectionist measures on Chinese goods as the reason why the exchange rate has depreciated.
But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things
A significant bilateral trade surplus with the US.(Check! China’s got that.)
A material current account surplus of more than 3% of GDP.(China does not have that.)
Persistent one-sided intervention in its currency market.(China’s move on Monday doesn’t fit this bill, so no.)
But isn’t downward pressure on the Renminbi just part of the what happens to a currency when its economy starts to slow and it’s selling fewer exports.
Winners with a cheaper yuan
1. Chinese exporters are more competitive abroad.
2. Foreign consumers of Chinese products – imported products are more affordable.
3. China’s case for becoming a reserve currency could be bolstered by letting markets determine the exchange rate.
Losers 1. Chinese companies that have debt denominated in dollars, or buy things in dollars like Chinese airlines, or other businesses that rely on imported oil. 2. Companies that compete with Chinese firms – including those in neighboring countries. 3. Companies that depend on exports to China – like the makers of luxury goods and mining companies. 4. Anyone worried about weak inflation in the U.S. or Europe
Below is a very good video from the FT which outlines the growth of the Chinese currency – the Renminbi (RMB). It includes some excellent graphics including the value of the currency against the US$ from 2005 – 2015 (see graphic below)
1948 – RMB was put into circulation by the Communist party
1997 – RMB was pegged to the US$
2005 – Peg was removed
2009 – China allowed approved companies to settle trade payments with non-Chinese customers using the RMB
2015 – 20% of China foreign trade is settled in RMB compared to 3% in 2010
2015 – RMB the 5th most traded currency although it is a long way behind US$ and €
The Chinese authorities want to have the RMB included in the basket of currencies that make up the IMF’s special drawing rights. This would mean an official endorsement of the RMB as a reserve currency. However one of the conditions of the IMF of being a reserve currency is that it must be freely tradable. Although the Chinese government is reducing its interventionist approach it is not yet ready to give market forces complete free rein over its exchange rate.
The US Treasury officials are not happy about the recent depreciation of the Chinese renminbi after a period of appreciation from 2010. Chinese authorities want to avoid the influx of ‘hot money’ into the economy and therefore the central bank has been keen to trick speculators who are getting used to a steady appreciation. This can put doubt in the minds of foreign exchange dealers who can take the hint and sell renminbi which in turn depreciates the currency further. Nevertheless the depreciation of the renminbi is greater than you think once you consider inflation.
How do they set the renminbi exchange rate?
Each day at 9.15am Bejing time the Peoples Bank of China – the Central Bank – in conjunction with the State Administration for Foreign Exchange (SAFE) issues a circular to all the banks in China stating the reference rate for the US dollar against the renminbi. However authorities are now experimenting with allowing the renminbi to move within a daily limit either side of a benchmark set by the central bank.
How does inflation affect the value of the currency?
What has little exposure in the media is the impact of relative rates of inflation in different countries when working out if a currency has depreciated and appreciated. The depreciation of the renminbi is actually greater than what you think. Figures that are widely used to show the level of depreciation are stated in nominal terms and does not account for the difference levels of inflation in both countries – in this instance the US and China. When you consider the real value you find that between December 2013 to April 2014 the renminbi actually fell 3.2% rather than 2.8% – see table below. However if you consider the period June 2010 through to November 2013 the renminbi actually appreciated 18.5% in real terms as against 12% in nominal terms. Inflation makes a difference because if there is higher inflation in the US than in China in takes more renminbi to buy the same number of goods so the renminbi is worth less. The opposite applies if the inflation rate is higher in China.
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
There has been much talk of the Chinese currency the Renminbi becoming the reserve currency of the world. If you were to look at the trading volumes you would think that they are not far off the mark. However the growth has been so large in the last few years mainly because it has come from such a low base. But the following points put it in perspective:
* The Renminbi is the 7th most used currency according to SWIFT a global transfer system
* The Renminbi accounts for only 1.4% of global payments – US dollar is 42.5%
* When you look at assets open to international buyers there are just $0.3 trillion of Chinese assets available compared to $56 trillion of American – this is one reason why the US dollar is liked as a global currency.
For the Renminbi to become a more dominant it has to become global. An easy way for this to happen is for China to run trade deficits as this will add to the global holdings of Renminbi on a daily basis. However China has traditional run surpluses which means that more foreign currency is coming into the economy. On the other hand the USA has run trade deficits which in effect adds to the global holdings of US$. However even if China did run deficits what could the holders of Renminbi do with it? China could open the Capital Account of the Balance of Payments which would encourage investment. There is still a long way to go before the Renminbi becomes the reserve currency.