The story behind China’s weakening currency

By Kanupriya Vashisht | February 4, 2016 | Last updated on February 4, 2016
3 min read

Downward pressure on China’s currency is due to interest rates, which are rising in the United States and falling in China.

Thanks to this scenario, China’s currency and exchange rate will be affected, and we may see further weakness in the renminbi, says Kenrick Leung, director of investments at Amundi Asset Management in Hong Kong, and manager of the Renaissance China Plus Fund.

But, China’s recent currency fluctuation has also been market-driven, he adds. “I don’t buy into the camp that believes China is trying to devalue its currency to be more export-competitive. If you look at the end of last year, it was quite important for the [People’s Bank of China] to show that there was flexibility in the currency and to let market dictate the pricing of the currency, along with other commodities and products.”

Meanwhile, the PBOC was also focused on making sure the yuan was included in the International Monetary Fund’s Special Drawing Rights basket, alongside the U.S. dollar, euro and yen. The IMF includes a currency only if it adheres to certain market-based criteria. Leung says, “That’s one of the goals [the PBOC] has accomplished.”

Read: Clients worried about China? They shouldn’t be

The devaluing of the renminbi isn’t a major issue, he adds, since “most believe the [currency] is overvalued and that it needs to be devalued. But I think it’s much more complicated than that.”

Read: Global weakness masking emerging market strengths

Leung explains that “the capital account of China has been a one-way bet for the last few years. Over the last decade or so, it [built] $4 trillion of reserve quickly. And over the last year or so, we’ve seen the reserve number come down steadily. We can [debate] about how much reserve China actually needs, but [that] has everything to do with the fact that we will see slower rates of growth in China.”

As a result, he adds, “People are a little bit warier of how safe their money is. So there’s outflow of money out of China. But the PBOC is very savvy. We may get weakness in the renminbi, but it will be 4% or 5% per year, and that’s inevitable if you’re lowering your interest rates at a time when there’s capital outflow.”

Overall, says Leung, the PBOC is committed to releasing economic stress and maintaining a certain amount of liquidity in the system.

Read: Find opportunity in volatility

Investment opportunities

Leung foresees opportunity in the Chinese market as a result of volatility, which will be caused by China’s weakening growth and currency. Such volatility could trigger a capital market sell-down and bargains will be available.

Read: Canadians hoarding cash amid volatility

But, “It’s not about looking at beneficiaries of renminbi weakness,” he says. “It’s more about looking at beneficiaries of a market sell-down, where valuations [could be] extremely attractive in some equity spaces.”

Since global markets are weak, he notes, a 3% move in the renminbi won’t significantly boost China’s exports. “Individually, there are a lot of companies hurt by the renminbi being weaker. They are taking foreign-exchange losses.”

What a weak currency will do is change the perception that the renminbi will always rise and that, as a result, it’s acceptable for China to have foreign debt, says Leung. “It’s no longer a one-way [appreciation] bet, which is what the game has always been. Companies have been raising off-shore debt [since] debt servicing gets easier as the renminbi strengthens. That’s no longer the case.”


The ins and outs of global macro

Why China’s state enterprises are attractive

Kanupriya Vashisht