“Emerging market currencies, ex China, are about 15% undervalued on a purchasing power parity-basis, the most they have been for a number of years,” he explained. “We have really seen a pronounced weakness, and China has maintained the renminbi peg, so China is experiencing producer price inflation-deflation and there is a competitiveness problem.
“Some would argue that leads to a devaluation by China to regain competitiveness, which in turn leads to a wave of deflation from Asia to the rest of the world, ultimately pushing down inflation in the US.
“Frankly, there is an issue in terms of capital flight and competitiveness, but the big call globally whether or not China devalues, which would have huge ramifications on emerging and global markets.”
China is currently awaiting the International Monetary Fund’s deliberation over whether the renminbi should take a place alongside the dollar, euro and yen in its special drawing rights currency basket.
Albert Edwards, chief strategist at Société Générale, believes that – considering the slowdown in China’s GDP growth – in order to avoid being swept into the deflationary whirlpool, China must go against this desire and bring down its renminbi-dollar peg.
“The descent into outright GDP deflation in China explains the more aggressive, even slightly panicky, policy easing measures there,” he expanded.
“China may wish to keep the renminbi stable at this time while the IMF is currently considering including it in the SDR currency basket, but the economy is simply not in a position to withstand a major yen decline bringing down the currencies of its competitors in the region and the additional deflationary impulse.
“China must start guiding its currency down against the dollar, and it can do that easily now it has a balance of payments deficit by doing absolutely nothing – i.e. not intervening any longer to hold it up.”
But with the IMF judgement due in the autumn, Anna Stupnytska, global economist at Fidelity Worldwide Investment, says China is unlikely to tinker with its currency until a decision has been made.
