Who knew?
That there’s a renminbi futures market even though the Chinese government strictly limits such trading in its currency. Hedge funds and other traders use the NDF market—that stands for non-deliverable forwards—to hedge against or to speculate on moves in the renminbi.
Why is this more than a curiosity? Because just as prices on the fed futures market tell you the odds that traders are putting on a move up or down in U.S. interest rates, the renminbi NDF market tells us what the consensus is on how much the Chinese currency will appreciate this year.
And right now traders on the NDF market are betting that China will end its policy of pegging the price of its currency to the U.S. dollar this year and pricing in a 2.7% appreciation in the renminbi against the dollar by the end of 2010, according to Bloomberg.
Yesterday the official exchange rate stood at 6.8264 Yuan to the dollar. (Yes, the name of China’s currency can be confusing. Technically there is a difference between renminbi and Yuan but for our purposes here the terms are interchangeable.) On the NDF market the price hit 6.6262 yesterday. That was the highest since February 1.
gusspresso24,
Good point. I would add that companies which sell almost exclusively in the domestic Chinese market should make out very well with an RMB/$ de-peg, whereas Chinese exporters may gain in market share but lose in sales, making the whole change negligible (possibly negative if they lose enough business because of it).
Regarding renminbi and Yuan:
One is the name of the currency and the other is the unit of the currency. Most countries don’t have a separate name for
each. The U.S., China, and the U.K. are three of the very few countries that do. Renminbi is analogous with the U.S.
greenback and the U.K. sterling. And, the yuan is analogous with the U.S. dollar and the U.K. pound.
hey ifxeyes,
Ed has spelled out one of the two major impacts of currency fluctuations. The other here, is that if a chinese stock is trading in USD, there is a direct benefit to US stock holders of an appreciating Yuan. Say the market cap of a company is 100 as measured in Yuan. This would be equivalent to 14.65 USD converted at a rate of 6.8264 Yuan per Dollar (100 divided by 6.8264). If the Yuan appreciates/strengthens in value against the dollar so that the conversion rate is 6.5 Yuan per Dollar (it takes less Yuan to buy a single dollar), and assuming the value (in Yuan’s) of the company has not changed (100), the market cap of the company on the US exchange would have gone up from 14.65 to 15.38 USD (100 divided by 6.5).
China Building Bubble: “Beijing had an office vacancy rate of 22.4% in the third quarter, the ninth-highest of 103 markets tracked by broker CB Richard Ellis (CBRE) (CBG).”
http://www.businessweek.com/magazine/content/10_09/b4168018737687.htm?chan=innovation_special+report+–+eye+on+architecture+2010_special+report+–+eye+on+architecture+2010
Bad news in another emerging market, with significant implications:
http://www.ft.com/cms/s/0/dbf4284c-2afa-11df-886b-00144feabdc0.html
Just what the U.S. economy doesn’t need: a trade war with Brazil. Smoot-Hawley redux?
ifxeyes,
If the RMB appreciates against the dollar, Chinese companies which export will find their products could be less competitive, due to a less advantageous pricing advantage they would have.
Look at it this way: If you buy a Chinese product which costs $1 now, after (and assuming) the RMB appreciates 2.7%, then it will cost $1.03 (they would round it up obviously). Mind you, that doesn’t mean everyone would suddenly stop buying Chinese products, but where a Chinese product was only 97% of the cost of another product, the Chinese could end up losing some export business.
With that loss of business, the Chinese stock market would see some effect, and certainly Chinese exporters could see a dramatic impact.
Forgive my ignorance, but how does this information impact the Chinese stock market, individual Chinese stocks, etc.?
rolfer1,
I wouldn’t buy CYB. You know it’s based on China’s money market rates? According to Wisdomtree’s own site, money markets in China pay -2.1% (yes, that’s negative). While it does allow you to take advantage of the exchange rate, you’ll end up losing money the longer you hold it.
Sorry Jim, 6.6262 is the highest or lowest since Feb. 1?
Jim – any comments about playing the CYB ETF vis-a-vis the imminent yuan appreciation v. the dollar?
I can see 2.7% by the end of the year, BUT I don’t see the Chinese government de-pegging that entire amount in the first step. It’ll be more like 1% to start. They’ll want to see what effect it has before they do more.