The Daily Update - Renminbi

This week the US Department of the Treasury issued a report to Congress on Foreign Exchange Policies of Major Trading Partners of the United States. Bilateral trade imbalances are a key concern for this US administration and the report monitors ‘where unfair currency practices may be emerging and encouraging policies and reforms to address large external surpluses’.

The Treasury looks at 3 criteria in compiling a ‘Monitoring List of major trading partners that merit close attention to their currency practices’: First, ‘a significant bilateral trade surplus is one that is at $20 billion’; Second, ‘a material current account surplus is one that is at least 3 percent of gross domestic product’; and third, ‘persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2 percent of an economy’s GDP over a 12-month period’. In the latest report, the US Treasury named China, Japan, Korea, Germany and Switzerland as trading partners whose currency practices require monitoring but refrained from naming any major trading partners as currency manipulators.

Interestingly, Taiwan was removed from the monitoring list having only met one out of three criteria (a material current account surplus) in the past two reports and reflecting reduced foreign exchange intervention. But India was flagged as moving in the wrong direction having stepped up the ‘scale and persistence’ of net foreign exchange purchases to ~1.8 percent of GDP and having a significant bilateral goods and trade surplus with the US.

Despite, Donald Trump’s rhetoric the report only went as far as saying that China, with a trade surplus of USD356bn over the four quarters to June 2017, continues to be scrutinised and that the US is ‘concerned by the lack of progress made in reducing the bilateral trade surplus’. It even acknowledged that in spite of ‘the extremely large and persistent bilateral trade imbalance, China’s multilateral external position has undergone greater adjustment in recent years, with its current account surplus falling to 1.4 percent of GDP in the first half of 2017 from 1.8 percent of GDP in 2016, and down from 10 percent of GDP in 2007. Further, after engaging in one-way, large-scale intervention to resist appreciation of the renminbi (RMB) for a decade, China’s recent intervention in foreign exchange markets, tightened capital controls, and increased discretion over setting the daily fixing rate of the RMB have likely prevented a disorderly currency depreciation that would have had negative consequences for the United States, China, and the global economy.’

In fact, this year the renminbi has appreciated 4.4 percent (to the end of September) versus the US dollar although weakened 0.5 percent against China’s Foreign Exchange Trade System (CEFTS) nominal basket, a trade-weighted basket of 24 currencies published by the PBOC, countering any suggestion of ‘unfair currency practices’.

While it is true the renminbi has done well year-to-date, we still see scope for it to appreciate helped by China’s positive NFA position and a persistent, albeit smaller, current account surplus. Moreover, the renminbi remains undervalued on an income adjusted purchasing power parity basis (Big Mac data) and the US dollar should peak as the Fed tightening cycle runs its course. When the positive carry is factored in (Chinese rates are higher than US rates) the return from holding renminbi is further enhanced: YTD the renminbi (CNH) total return is 9.09 percent compared to 5.35 percent on a spot basis.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.