China has started to loosen con­trols on its cur­rency

The Pak Banker - - Front Page -

BEI­JING

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.

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