In August, the Chinese currency, the renminbi yuan (RMB), fell in value by 2% on each of two successive days. This movement provoked much comment. Most of it recalled the words of Chicken Little: “The sky is falling!” But as I look from my window in London, the sky remains stubbornly there (albeit grey).
What happened? The Chinese authorities decided to adjust their currency peg with the US dollar and, effectively the Euro, on a Tuesday. On Wednesday market participants, caught off guard, decided that a further 2% should be anticipated. On Thursday, the People’s Bank of China (PBOC) declared that the RMB remained a strong currency.
Why did it happen? There was plenty of speculation. Here are some:
- China’s growth has been slowing from the stellar to the merely atmospheric so a lower currency means export growth.
- The devaluation – whether engineered by the authorities or driven by markets – is a way of rebalancing the currency in the context of the Quantitative Easing policies of the major OECD countries.
- The mechanism of calculation for the dollar peg was getting out of date (a lot has changed) so best do it now.
- China wants its currency as one of the world’s reserve currencies in the SDR – and the main requirement for this a free currency. Let’s prepare.
There’s a fifth. I haven’t interviewed Zhang Xiaohui, assistant governor of the People’s Bank of China, but these were her quoted words: “A fixed exchange rate looks stable, but it hides accumulated problems.” She knows of what she speaks. She spent a decade in the PBOC’s monetary policy department and was promoted to assistant governor last week. On Friday, she told a press conference that there are no grounds for persistent and substantial depreciation as sound economic fundamentals determine that the RMB will go back to a rising path. "The central bank is capable of keeping the exchange rate basically stable at an adaptive and equilibrium level," Zhang said, and the discrepancy between the central parity and the actual trading rate has largely gone.
China is a big economy – on some measures the biggest in the world. Its trading is largely connected through the dollar. Germany is a big economy – the biggest in the Eurozone by some way and also in the EU and in Europe (they are three different things). It has had no problem with a fixed exchange rate – and Greece wants to stay in the Euro.
In England, exam questions end: “Discuss”. In the US, there’s a more colloquial expression: “Go figure”.
Want to know more?
Hear more about the RMB and treasury management at EuroFinance’s 24th conference on International Cash & Treasury Management on 23-25 September 2015 in Copenhagen, Denmark.
Thursday 24 September 2015 at 16:00
Stream 2 - Open Spaces RMB: It’s time to connect China to your global treasury
It pays to be prepared to make the renminbi (RMB) jump and companies are beginning to think now is the time. While deregulation has made sophisticated cash management solutions available in theory, how many companies have been able to take advantage of the key reforms in practice? The pace of adoption is increasing and the RMB itself may be about to take another huge leap towards full internationalisation. The Chinese currency now accounts for a significant amount of world trade and at least 60 central banks now have reserve exposure to it. This means that when the IMF reviews the basket of currencies that make up its own currency – Special Drawing Rights (SDR) – the RMB has a good chance of being included in the 2015 revision. Automatically, all central banks would become holders of RMB exposure through their SDR assets and the official recognition of the RMB’s reserve currency status would spur RMB investment by central banks all over the world. But meanwhile, this Open Spaces will feature commentary from a number of companies at various points in their RMB strategy. The session will look at how companies can better use the RMB internationalisation in liquidity structures, FX flows, trade and funding and investment opportunities. Is the connectivity to China to the rest of the world now possible? With insight from the EuroFinance Corporate Treasury Network RMB group this session will also feature exclusive content and global survey results.
Angel Yang, Director, Global Treasury Operations, Yum! Brands, Inc., US