Join        Login             Stock Quote

The End Of An Era For Renminbi?

 April 07, 2012 12:59 PM

The market is digesting the fact that the era of a predictable and steady Renminbi (RMB) appreciation is at an end, and even senior Chinese officials have made recent statements that they considered the RMB close to its fair value.

On the economic front, China's current account surplus has dropped sharply and is likely to stay down for the next few years. Between 2003 and 2007, the surplus trebled and reached 10.1 percent of GDP in 2007. Since then, the surplus has shrunk rapidly to 5.1 percent of GDP in 2010 and only 2.7 percent in 2011.

"There is certainly a cyclical element to the drop – global economy first entered into a deep recession and then stayed rather stagnant while China's domestic demand was pushed up by a strong stimulus," UBS economist Tao Wang wrote in a note to clients.

[Related -Market Needed a Yellen Bump and Didn't Get It.]

Meanwhile, external demand is likely to remain depressed as developed economies go through long-drawn structural difficulties, and China will find it increasingly difficult to gain market share given that they are already large.

On the other hand, China's domestic demand will be boosted by various policies; and importantly, China's real exchange rate has appreciated significantly in the past few years.

"Therefore, we expect China's current account surplus to remain below 3% of GDP in the next couple of years," Wang noted.

According to several estimates, China's exchange rate is at its fair value when its current account surplus is between 2.5 percent and 4 percent of its GDP. At the same time, China's current account surplus has dropped below 3 percent of GDP and is likely to stay down, it is difficult to argue that the RMB is undervalued any longer.

[Related -Will The Sluggish US Housing Market Perk Up This Year?]

"While the implied RMB depreciation against the USD in the NDF market in Q4 2011 may have reflected the market's belief that China might depreciate the currency to save exports, we think now it is more widely accepted that perhaps fundamentally the RMB is no longer much undervalued," Wang said.

In 2012, the economist said China would allow for a further 2-3 percent RMB appreciation against the USD, given the recession in the euro zone, the election politics in the US, and the threat of a "currency bill" and other potential protectionist measures in the US against Chinese exports.

After that, the government may allow market forces to play a bigger role, and RMB exchange rate is expected to be range bound with increased two-way volatilities in 2013 and 2014.

iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageWill The Sluggish US Housing Market Perk Up This Year?

Housing remains a weak spot for the US economy, as suggested by yesterday’s news of a bigger-than-expected read on...

article imageThe Only Homebuilders To Own Right Now

Now is the time to invest in the housing market, but you must be read on...

article imageUS Economic Growth Slows in Q4

US GDP growth fell short of expectations in last year’s fourth quarter, the government reports. National read on...

article imageReversals After a Gap on the Open Could Mean Anything

Yesterday stock indexes gapped up on the open but then reversed course to close sharply lower. This type of read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

The Only Homebuilders To Own Right Now
More Articles on: Forex

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.