With Trump having labelled China a currency manipulator on more than one occasion, the undervalued renminbi remains a key feature in the trade negotiations. Some may say the precedent could be set by the US-Mexico-Canada (USMCA) Agreements’ disciplines on currency manipulation, where currency and macroeconomic transparency requirements are set and, if violated, could lead to a dispute appeal.
In August, when the renminbi fell through the psychological 7 level against the dollar, the US Treasury department quickly declared China a currency manipulator; the first time in ~25 years. We believe it is in no-one's interests for Chinese policymakers to devalue the currency, for one, we saw what happened in 2015 following the sharp devaluation which destabilised the nation’s asset classes and saw capital flow out of China. Chinese policymakers have also reiterated time and time again that they wish to internationalise the currency and for that to happen it needs to be more market-driven; which we have seen more of lately. Finally, with non-manufacturing activities making up over half of China’s GDP, coupled with the nation’s path to a more sustainable, consumer-led economy, a stronger currency is more desirable.
Of course, the undervalued renminbi will be used as a bargaining tool during these ongoing trade talks, especially as China is looking for a rollback in currently imposed tariffs. However, when a trade deal between the world's two largest economies is finally agreed, we expect the renminbi to appreciate; we saw hints of this last week when China announced that the US could rollback tariffs, once confirmed as “incorrect” by Trump himself the redback sold-off.
What is important to markets is that the currency remains stable against the dollar, not whether it is undervalued or not. As regular readers will know we have long believed the renminbi is undervalued, thus the launch for our Renminbi Bond Strategy 12 years ago. The onshore renminbi has been one of the best performing currencies globally since, appreciating over 38% against the dollar on a total return basis.