The jury is out as market digests RMB moves
Opinion is divided about whether this week's unexpected move by the People’s Bank of China (PBoC) to devalue the renminbi marks a landmark for the country or reeks of desperation.
Many economists expected Beijing to deploy monetary and fiscal policies to manage its ailing economy, rather than shift exchange rate policies. And as the news of the currency depreciation came on the back of some disappointing economic data, it caused even more surprise.
The country’s exports tumbled 8.3% year-on-year in July, while imports fell by 8.6%. Manufacturing and infrastructure investment growth also slowed last month when compared to June.
“Any move from a pegged currency to flex is best to do when the economy is growing,” Alicia Garcia Herrero, Natixis’s chief economist for Asia Pacific, told GlobalCapital Asia. “The last time China engineered a depreciation was in March 2014 when it was fed up with all the inflows and didn’t want the renminbi to go up too much.
“But it still didn’t regain all of its competitiveness then and the dollar bull market only made things worse. So I can understand why [the PBoC] did it now, but they have reacted too late because the economy is waning.”
Late or not, the impact has been widespread, with currencies and equity indices taking a hit immediately after the announcement, although some welcome stability came on Thursday.
Asian economies are expected to be the most susceptible to the renminbi’s depreciation because while some are excessively reliant on exporting to China, others compete with Chinese exports.
US companies that have big exposure to China also faced the brunt of the renminbi depreciation, with a big sell-off witnessed in stocks such as technology giant Apple and automobile firms Ford Motor Company and General Motors.
Panic is in the air, with many analysts raising the question of whether China has started a currency war. But there are also those — including the International Monetary Fund — who are big supporters of the change, as it moves China towards greater liberalisation of its currency.
"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," the IMF said in an August 11 statement. "We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years.
Some bankers also reckoned the move would bode well in the longer run. A capital markets head in Hong Kong said it helped the renminbi market’s development as it allowed for the currency to become fully convertible in the future.
Short-term problems are however taking a toll. China has witnessed massive capital outflows of $360bn over the past 12 months. The recent stock market rout has also certainly not helped, and the incredible measures taken by the regulator to prop up its equities is skewing the way people perceive renminbi’s devaluation.
“The Chinese economic situation is so bad at the moment and the communication by the PBoC comes across as a sign of desperation,” added Herrero. “Although the aggregate impact of a depreciation is positive for China, with more assets in USD than liabilities, we cannot forget that it will be negative for corporates with a lot of US dollar debt.” (See separate story.)
The pessimism is likely only to escalate, as many market watchers are still anticipating an interest rate hike to be announced by the Federal Reserve in September.
“We still think it can happen,” said senior economist at a different bank. “RMB and the USD are so closely linked so some will say the Fed will re-think everything now, but our expectation is that a rise will still happen. So there will be more shocks ahead.”