According to Greenberg, if the Chinese central bank decides to let the renminbi find its own level, which could be between 5% and 35% lower, all at once, it could boost China’s competitiveness but would serve as a deflationary shock to the rest of the world, wreaking havoc on China’s trading partners and thereby negating any real benefit.
“We have been reflecting on how China will weigh the cost of releasing this shock against the prospect of spending (perhaps most of) its foreign-exchange reserves defending the currencyAccording to some estimates, $700bn to $800bn has already left the country in 2015 and more could follow if greater capital controls are not put in place. We understand the attraction of letting the currency float freely and find a “natural” equilibrium, wherever that may be,” said Greenberg.
Despite the country’s problems with excessive leverage in the system, coupled with overcapacity in a number of sectors, capital flight, and pressure to maintain the renminbi at what is “probably an overvalued level”, Greenberg believes China’s problems are not insurmountable and that its policy makers have the necessary tools to deal with them.
Therefore, Hermes has adopted a neutral weight and has decided to stay with existing Chinese positions, according to Greenberg.
Rob Marshall-Lee, head of Asia & Emerging Markets at Newton Investment Management, agrees that there is a problem with the currency, but also shares Greenberg’s optimism. “Fears over Chinese renminbi depreciation do have some merit given its trade-weighted appreciation over recent years, and this has unfortunately not been helped by poor communication by the central bank,” he said.
Marshall-Lee added: “I expect the renminbi to be allowed to depreciate by as much as 5% against the dollar in the coming year as the People’s Bank of China gradually increases the market’s role in determining the exchange rate. Strengthened enforcement of existing capital controls should also help limit outflows going forward, whilst the reversal of long renminbi carry trades should be near completion.”
Rob has managed the Newton Global Emerging Markets strategy since 2011, and is overweight in China and Hong Kong, holding 32% in China and Hong Kong compared to 27% for the index.
“While the Chinese economy is undergoing a structural slowdown, we think it would be incorrect to translate this into an assumption for an imminent ‘hard landing’ given that policy makers still have significant flexibility to support growth,” he said. Potential policy measures include interest rate cuts and reducing the high bank reserve requirement ratio “substantially”, according to Marshall-Lee.
