In trying to read the tea leaves of China’s economic and monetary politics, you have to pay as much attention to the Who as to the What of any official statement.
So while it’s significant that anyone in the Chinese government is making noises about China abandoning the renminbi/U.S. dollar peg that’s been in effect since July 2008, it’s just as important to note that the statement came from the governor of the People’s Bank of China and not from Chinese premier Wen Jiabao.
In a March 6 press conference Zhou, the head of China’s central bank, called the policy of keeping the Chinese currency pegged at 6.83 to the dollar a special policy aimed at helping China weather the global economic crisis. By pegging the renminbi to the dollar Chinese exports gained a price advantage over competitors as the dollar dropped in value during the crisis.
That certainly implies that Beijing will drop the peg once the global crisis is over.
In contrast Wen did not bring up the renminbi/dollar peg in his state of China speech to the National People’s Congress on March 5. The premier’s most recent comments came in December when he said only that “We will not yield to any pressure of any form forcing us to appreciate.”
There’s a brief window after the National People’s Congress ends and before China’s president Hu Jintao visits Washington in April for China to end the peg without seeming to make the move in response to U.S. pressure. The consensus among economists and China watchers, though, is that mid-2010 is more likely.
Global politics aside, China has increasingly good reasons to end the peg.
As the dollar rises against the against the euro, pegging China’s currency to the dollar costs China exports to Europe and makes China’s imports from Europe more expensive. The renminbi-dollar peg also depresses Chinese incomes and domestic consumer demand (since a cheaper renminbi buys less) at a time when Beijing wants to increase domestic incomes and consumption. And an undervalued renminbi has added to the flood of foreign cash into China making the job of fighting inflation and controlling speculation even tougher.
Judging by how China moved in 2005 when it allowed a controlled renminbi float, the betting is on a quick but small 2% appreciation of the renminbi followed by a very controlled move upwards totaling about 3% to 5% in 2010.
Anything faster though would push hundreds of margin Chinese manufacturers into the red.
jim
“as the dollar rises against the euro, pegging the chinese currency to the dollar cost china exports to europe and makes china’s imports from europe more expensive.”
Today, as the dollar rises against the euro so does the renminbi. But when the renminbi is unpegged from the dollar it will have a higher value then the dollar making exports to europe even more expensive for europeans. Am I right?
The second part of your statement is true because a higher valued renminbi will buy more european goods.
Jim, I had posted this previously (no response). What is your opinion of playing the “unpeg” in the yuan through Wisdom Tree’s Chinese Yuan ETF – CYB?
creativekev,
Good luck getting a dip on MCHFX. You’ll need some bad news on China for that to happen, although I expect that should be coming shortly. Maybe this week or next? Watch closely…
Apparently China’s CPI will be reported on Wednesday. If it shows an upward trend, then it makes it more likely that they will allow their currency to appreciate vs the US dollar.
The salient issue is how to play this with investments. Jim mentioned investing in stocks that profit from domestic consumption but avoiding stocks that profit from exports. Since exports to the rest of the world would be more expensive, the export sector of the economy would in all probability take a hit. Some analysts on the ground in China argue that since the export economy mostly employs poor, unskilled laborers (reportedly millions of them), the government will be reluctant to do anything that puts them out of work in any significant numbers. Some domestic consumption stocks took a jump today perhaps because of the pending currency decision.
Does anyone have any favorite stocks or ways to play this “Wen” (one) or yuan.
I got a kick out of Jim’s pun. But for us purists, “Wen” in Chinese 溫 is actually pronounced like “one” in English, not like “when.”
Mr Jubak in an earlier post you mentioned where to put cash. What is your thoughts on CYB with the potential rise in the renminbi ?
Jim, you wrote:
“As the dollar rises against the against the euro, pegging China’s currency to the dollar costs China exports to Europe and makes China’s imports from Europe more expensive..”
Shouldn’t Euro denominated imports from Europe now be cheaper to a Chinese consumer paying in Renminbi making imports from Europe actually cheaper and not more expensive?
Don’t mean to nitpick, but want to understand this mindbending multicurrency relationships.
It is interesting that 25 years ago, usa was a producing nation and our leaders sadi we will be better off if we export our jobs to china, and we did, and ,,, we will get a lot of cheep stuff.
And we did get cheep stuff !
Goba od it !
Then we ran out of money, and we ran out of credit, credit, and the cheep stuff is about to go back up to the price it was when we made it ourselves… except,,, we dont make it anymore, and besides that now we ain’t got the money anymore to buy it.
The joke s on us.
Thanks, Ed.
For domestic (US) stocks and funds, I actually read some news on them as time permits, but with China (or foreign stocks i general), I find there’s not a lot of timely news on Yahoo Finance or MSN. For instance, I once owned BIDU and it would make a strong move up or down, and intraday I’d try to find related news but I’d find nothing. So it’s also a matter of less timely news. But thanks, Ed, I know you’re a veteran on these things, and this affirms my confidence on MCHFX. The only thing is, MCHFX has not been down at all (was down a bit earlier in yr, but now back up), so I’m just waiting for a dip in price.
creativekev,
MCHFX certainly has a strong history. If you don’t have the time to research stocks, it looks like a pretty decent fund to have. I’m almost tempted to buy it myself.
Hi, Jim,
You had mentioned MCHFX in a post a while back (in fact I believe you mentioned you own this yourself). However, your more recent posts on China mentioned FXI or individual Chinese stocks as good candidates for buying into China. Do you still think MCHFX is worth buying? Also, my situation is that, aside from reading your blog here, I won’t have time to do any other research before buying. Would MCHFX, being actively managed, be a better option than an index or individual Chinese stock? Thanks.
The unknown here represents the controlling factor – that being the social unrest over the wealth gap. Unfortunately, there is no way to measure this and certainly labor unrest is something never reported. Some estimate the error in the reported census in China to be as high as 300 million, meaning China’s population is closer to 1.6 than 1.3 billion. Many wander throughout the east coming from Western China and seek work without benefits of any kind – they don’t exist, officially. Think about that for a second. A population equivalent to the US wandering in a space similar to the US looking for jobs and a way to survive. It’s a time bomb. If anything on Wen’s antenna senses concern or a threat to social stability, you will not see the peg change in spite of what is said by anyone in or out of government. My bet: nothing changes.
word is 3%… is what they are aiming for according to Chinese financial media talking heads
“If not now, Wen?”
Another pun Jim? I guess you didn’t want to “buck” your trend…
Anything that puts more money in the Chinese citizen’s pocket (Or makes it seem as though) is a good thing! Speaks to one of Jims column on MSN not long ago where he said “One way to solve the problem that China faces (Decreased exports to the rest of the world) is to start to build out an internal system of consumption. ” This will be a step in the right direction.
Unrelated to this post, but related to a Jubak Pick… CSCO plans “major” announcement for Tuesday:
http://www.marketwatch.com/story/cisco-to-make-major-announcement-on-tuesday-2010-03-08