China has started to loosen controls on its currency
For more than a decade, China's currency, the Renminbi (RMB), had been on a path of appreciation, but some weakness this year generated renewed talk about whether the currency is fairly valued against global currencies.
As global equity investors, we are constantly faced with currency changes. This is an important factor when considering our investments, because currency movements impact companies' earnings and operations. Of course, there are winners and losers with currency ups and downs. Exportdriven companies can thrive with weaker national currencies, while domestic-driven industries are more likely to suffer. As one of the world's global export powers, China has kept tight controls on its currency in order to enhance its investment and trade position, but those controls are starting to loosen.
Currency dynamics can be confusing, and there is a lot of confusion just in the differences in the Chinese currency names of RMB, CNY and CNH. To clarify, the People's Republic of China dubbed its official currency the "Renminbi" in 1949."Yuan" is the name of a unit of the Renminbi currency and is called one of two things depending on whether there is onshore or offshore use: CNY is in reference to RMB onshore in China (hence the "Y"), whereas CNH refers to RMB outside the China market offshore, primarily in Hong Kong (hence the "H"). Due to the effective segregation of the onshore/offshore RMB markets, CNY and CNH can often be subject to different demand and supply factors.
It's also important to note that while the name Renminbi means "the people's currency," the short name for the RMB or Yuan in China is also called the "kuai" (literally means piece). Spoken with a different tone (tones in Chinese language are very important since the meaning can change dramatically with a different tone) "kuai" can also mean fast. And now it seems that pressure on the RMB's convertibility is accelerating even though China's central bank ( the People's Bank of China or PBOC) has suggested it would prefer to slow things down for a more prolonged transition. China is the second largest economy in the world and if it is destined to potentially become the world's largest economy - which I believe it is - they will need to match that size with a position in currency leadership.
To lessen its dependence on the US Dollar and gain entry into the International Monetary Fund's currency basket, the Chinese government has indicated that they would like to make the RMB fully convertible on the international stage by 2015 (which some say is a bit overly ambitious especially given the current global environment), and has increased the use of the RMB in international trade and investment.
Hong Kong was the first location outside mainland China with an interbank market for RMB, therefore known as the "Offshore RMB Centre." Banks there have been encouraged to offer limited services and products denominated in Yuan, including so-called "dim sum" bonds which can be viewed as a step toward broader currency convertibility. Offshore RMB trading is also sanctioned and regulated in Macau. At the end of August, the PBOC announced a RMB clearing bank would also be set up in Taiwan.
The creation of new offshore centres has been a key policy focus for some time, and there's speculation London, Dubai and Singapore could also be potential destinations for offshore RMB markets. Our research indicates that the RMB is undervalued against the US Dollar at this time, but not by much. And, in the past month, there has been a rebound. Don't forget China has had many years of doubledigit economic growth over the past three decades, while its trading partners have been slower-growing.