The heart of the RMB

On the more immediate question of currency value, economist Andy Xie points out that it is not necessarily a function of economic growth. "Currency value is mostly about a country's attitude toward price stability," he says. "When a country's economic policy preference is for a quick fix - as in the US, or China - their currency's value is intrinsically unstable. But when a country is determined to be steady and sober, even dour, and prepared to take the much longer road of cut backs and innovation of their core industries, their currency will be stable and retain its value, like Germany, and to some extent Japan.

He maintains that if investors think the Chinese currency is going up, "maybe it will - short term. But over the longer haul, watch out."

Jim Walker adds, "If anything, over the past five years China has backed off a lot of its liberalization promises. Presently that's being partly reversed in the countryside, almost by force of consequence. That aside, however, what has been done is a very modest amount of liberalization. The RMB funds and the like are tiny in comparison with the power the central government and bank retain. So while things may be moving in the right direction, the pace is too slow."

The Chinese government plays a long game in everything it does, which is why CLSA views the situation much differently. A recent report noted that while China's central bank announced that it intends to "maintain the basic stability" of the RMB exchange rate, this does not imply a return to the peg.

The report goes on to say, "The PBOC used these same words to characterize its exchange rate policy while engineering an average 7% appreciation a few years ago. In 2H10 the RMB rose 3.1% against the dollar. Recently the annualized rate of appreciation has been in the 5-7% range, and that is the pace we expect for 2011."

 

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• Topics
• Renminbi fund
• Greater China
• CLSA Capital Partners