logo
  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 -The Boeing Company (BA) Q2 Earnings Preview: Durable Earnings Beater]

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 -Angie's List Inc. (ANGI) Q2 Earnings Preview: Trending Towards a Smaller Loss than Expected]

"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
Advertisement

Advertisement


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

rss feed

Latest Stories

article imageLadenburg Thalmann Financial Services (NYSEMKT:LTS): Heavy, Durable Insider Buying

Ahh, but any worries over price levels didn’t stop multiple insiders at Ladenburg Thalmann Financial read on...

article imageInternational Business Machines Corp. (IBM) Q2 Earnings Preview: Small Beat and Pop

International Business Machines Corp. (NYSE:IBM) will host a conference call Wednesday, Jul. 16, 2014 at read on...

article imageGoogle Inc. (GOOGL) Q2 Earnings Preview: A Few Pennies Either Way Make a Big Difference.

Google Inc. (NASDAQ:GOOGL) will hold its quarterly conference call to discuss second quarter 2014 financial read on...

article image19 Companies That Could Beat Earnings and Pop on Price Next Week

Using iStock’s proprietary iEstimates model, we have identified 19 publicly traded companies that could read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

How To Profit From The Death Of The Big Banks
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.