China’s currency devaluation policy conflicts with its broader goal of renminbi (Rmb) internationalisation, according to HSBC economists.
In a week in which the bank continued to roll out its own Rmb initiatives, its research team argued that last week’s dramatic intervention was not designed to boost exports – as government officials claimed – but that it was “reform-oriented” and that Beijing has “other more effective tools on both the monetary and fiscal fronts to support growth”.
4% was slashed off the Rmb’s value over three days in which stock markets panicked and analysts fretted over the health of the world’s second-largest economy. China’s exports have slumped, while GDP growth is dangerously close to the 7% minimum target set by the government.
This, however, is more to do with weak global demand, rather than a strong Chinese currency, HSBC says, arguing that the devaluation is more likely to be designed to bring the Rmb closer to the IMF’s definition of a market currency, ahead of this year’s special drawing rights (SDR) currency review.
The analysts also questioned the viability of the manoeuvering. “The payoff is highly uncertain,” they wrote. “The sharp movement in USD-Rmb over the past week caught the world’s attention. But for an economy with strong and diversified trade relations with the rest of the world it is the real effective exchange rate (REER) that matters. The REER is a currency’s movement versus a basket of trade partners’ currencies, after adjusting for relative differences in inflation.”
“This feeds into arguments made elsewhere suggesting that a currency war is on the horizon, with East Asian economies rallying to make their exports more competitive by weakening their currencies.”
While the REER moved positively against the Japanese and Korean currencies last week, it is expected that those countries’ respective central banks will move to devalue their own currencies in the coming months, thereby cancelling out the gains made by China. This feeds into arguments made elsewhere suggesting that a currency war is on the horizon, with East Asian economies rallying to make their exports more competitive by weakening their currencies.
Analysts recommend lowering the interest rate, as a means of loosening the capital flow in the economy, and also stepping up fiscal support – a tactic the People’s Bank of China (PBOC) has resorted to on multiple occasions this year already.
HSBC, however, shows no sign of slowing its own Rmb development programme. This week, the bank was named as the Rmb concentration bank for LME Clear – the clearing bank for the London Metal Exchange. This allows the market to accept Rmb as cash collateral for margin cover, with HSBC being one of the banks permitted to clear transactions into the market too.
It also announced the facilitation of two cross-border Rmb loans from the Nansha FTZ and the Kunshan area of China, which have recently been drafted into the country’s cross-border lending programme. This means companies based in these areas can now borrow in Rmb from Hong Kong and Macau-based banks, while Taiwanese companies based in Kunshan can borrow in Rmb from their home country.
The transactions, involving a feed producer in Nansha and a Taiwanese electronics company in Kunshan, were worth Rmb20mn and Rmb15mn respectively.
“The two transactions signify rising corporate needs for cross-border Rmb financing in the Greater China region. As a leading international bank for Rmb businesses worldwide, HSBC is pleased to see that Rmb is being used more widely, beyond settling trade with mainland China. This paves the way for the currency to become a reserve currency in the near future. We believe China’s new FX fixing mechanism and more FX reforms in the pipeline clearly indicate that China is committed to making the Rmb fully convertible sooner, rather than later,” says Helen Wong, Greater China CEO.