China’s Central Bank seeks to discourage idea that Yuan is a “one-way trade”
Faced with the task of cooling off its credit markets and discouraging excessive foreign currency flows, China has recently demonstrated a willingness to let the value of its currency decline, contrary to the long-held belief that buying the renminbi was effectively a “one-way trade”.
This is according to Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“The perception in the market has been that the renminbi could only appreciate in value,” says Rodilosso. “It looks now as if the Chinese have set out to dispel that belief with the People’s Bank of China likely to allow the currency to trade in a wider band, with more latitude to move to the downside.”
Rodilosso says China is now fighting many battles at once, trying to control the deceleration of growth while also discouraging hot money flows and excessive credit creation. He noted that investors in renminbi-denominated equities and debt are indeed used to a steady appreciation, with the currency one of very few to appreciate versus the US dollar in 2013. The prospect of greater currency volatility is something that investors will likely start to consider, and ultimately may lead them to demand more compensation, in the form of yield.
A cheaper currency is a mixed blessing for investors, according to the Market Vectors portfolio manager.
“A weaker currency does have the effect of making it cheaper to repay debt denominated in that currency, potentially a small credit positive for some issuers,” Rodilosso says. “On the other hand, holders of the dollar debt of Chinese issuers, particularly those domestically-oriented companies without significant dollar revenues, might have greater reason to be concerned from a credit perspective.”
As China continues to seek what it believes is the appropriate level for its currency, investors would be well advised to keep a close eye on the actions of the Chinese Central Bank, Rodilosso says.
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