Yesterday marked the one year anniversary of the People’s Bank of China’s (PBoC) announcement of its reform to the onshore renminbi (RMB) fixing mechanism; which saw a large “one-off” devaluation of the currency. This created a huge amount of panic market wide, with some interpreting the change in exchange policy as being one aimed at gaining export competitiveness. We were however of the opinion that the central bank’s motivation was more to do with IMF’s decision on whether to include the currency in its SDR basket; where one of the institution’s criticisms of China’s foreign exchange policy was that the exchange rate was not driven by market forces.
One year on and the renminbi exchange rate policy has come a long way; the PBoC appears to have released its tight grip the RMB fix allowing it to be more market orientated and transparent. Developments include the announcement of capital account liberalisation rules (another key change for SDR inclusion), the introduction of the CFETS basket and opening of the Chinese interbank Bond Market (CIBM) to qualified foreign investors and the more “rule-based”, “close+basket” fixing rule.
It is also just over eleven years since China broke the decade long peg to the US dollar letting the currency appreciate from a rate of 8.2 to today's 6.65 level; an appreciation over the period of around 19%, or 1.7% per annum.
Looking even further back, it was the Japanese yen that attracted the attention having had its eleven year run. From the end of 1975 to 1986 year-end, the yen rallied against the US dollar by around 48%, or 4.3% per annum. Of course the yen is now seen as one of the “safe haven” currencies, but back in the day it was not too dissimilar to the RMB of today. Trade flows were the big economic numbers back then and Japan's export engine was at full throttle. We wonder what the renminbi would have done back then with global growth and demand on the up.
Seems to us that the Chinese have been a little unfortunate in the timing of their deregulation and opening up of their domestic market. The Japanese did seem to get the timing right although they have been paying back over the last twenty years for their explosion on to the global platform. We remain of the view that the Chinese currency will continue to appreciate over the coming years but as we have already seen in a more controlled manner than the volatile Japanese experience.