Rudi's View | Jun 21 2010
By Rudi Filapek-Vandyck, Editor FNArena
I can see why investors across the globe started the new week all-excited after the Chinese authorities on Saturday officially abandoned the RMB-USD peg that was put in place in July 2008, when the credit squeeze that had started from US subprime mortgages was clearly impacting on global growth perspectives.
Alas, I can also see a clear reason why today's enthusiasm won't last much beyond the first day of the week, as the Chinese announcement over the weekend was essentially a well-timed intention, but no action.
Is the yuan (or renminbi) now going to appreciate against the US dollar? It might, but any moves will remain gradual and within the unchanged Chinese policy approach of cautious moves work best in the long run.
Note, for example, how Saturday's announcement did not come with the much speculated one-off revaluation of the Chinese currency. Moreover, Chinese authorities have since stepped into the limelight and declared such a move as explicitly not being under consideration.
In fact, China no longer measures its own currency solely against the greenback, but against a basket of currencies including the USD and the euro. That much we know, but not much more.
So strictly taken it is well possible that, given the ongoing dire prospects for the euro, the yuan might depreciate slightly against the greenback in the months ahead, a prospect mentioned by some economists over the past 24 hours.
In all fairness though, the Chinese are very well aware of the importance of PR and of perception, and one would have to assume they will avoid attracting disbelief and frustration from other countries as much as possible.
As such, it is easy to see why some commentators are calling today's rally on risk asset markets as all excitement, but no substance. In essence they are correct: the Chinese are playing the world in a PR exercise that likely has the backing of the US presidential administration.
Note that next weekend the Chinese will be attending a summit of G-20 leaders. Chinese leaders have been fishing for acknowledgment of their crucial policy decisions and supportive role for global economic growth throughout the 2008 meltdown, but none have been received.
Not even Kevin Rudd, leader of arguably the country that has benefited most from China's economic resilience in very dark times, has stepped into the global limelight while saying “thank you”.
Of course, there are positives about the Chinese move. It can be argued that no such announcement would have been possible without Chinese policy makers having enough confidence on domestic growth prospects.
In addition, assuming the Chinese will at some point allow for gradual RMB appreciation to resume, the announcement takes the pressure off economic policy makers in trying to cool down property bubbles through additional interest rate hikes.
Given how much the possibility of a sharp downturn in Chinese property markets has weighed on overall investor sentiment these past months, this is a clear and positive stand-out from Saturday's announcement.
But more demand for copper? For crude oil? For gold?
We have yet to see the first evidence of any such impact appearing in Chinese import data. As things stand right now, investors shouldn't hold their breath.
The decision to abandon the RMB-USD peg without effectively revaluing the Chinese currency won't have any measurable impact on global growth or financial stability. It will support the Chinese government in its repeated dismissals of foreign criticism, however, and as such the move might mark the start of a smoother relationship between Washington and Beijing.
Again, this too is a clear positive, but hardly the stuff that should mark the start of a new rally for global risk assets.
As far as the RMB/CNY appreciation goes, market expectations are mostly for a revaluation of the Chinese currency of up to 5% during the remainder of this year. Whether this proves realistic or not will become visible over the months ahead.
Officially, the Chinese policy is one of allowing the currency to move by up to 0.5% on any given day against the USD – but this is not measured as against the last traded value of the previous trading session.
Every day the People's Bank of China sets a midpoint valuation for the currency against which the maximum of 0.5% can be traded against. This way the currency remains very much under strict government control.
Note, for instance, how today's midpoint as set by the PBoC was unchanged from the midpoint value set on Friday. Surely, and in the light of all of the above, this is the underlying message the Chinese authorities are communicating?
There is one argument from the more bullish commentators I am prepared to buy into and that is that global economic and financial circumstances are “normalising” and the Chinese announcement is further proof of this. As such, Saturday's surprise announcement could be reason for a more sustained increase in optimism and for rallying asset prices, but only if it is backed up by more evidence from the Fed and from global economic data.
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