Over the past few years, especially in autumn 2011 and May 2013, we have also witnessed a remarkable volatility in EM debt and EM currencies. Investors in renminbi fixed income have been pretty much shielded from this instability.
China (currency) crisis
Going forward, we believe that China and Chinese credits might play an important role in asset allocation, forming potentially a separate bloc within an investor’s EM bucket. As the current EM crisis appears to be more a currency crisis than a credit (risk) event, China’s strong renminbi might make the difference.
The renminbi’s value is greatly enhanced by China’s more than $3.5trn in currency reserves, which accounts for more than one-third of all currency reserves worldwide. However, the currency is also well supported by China’s strive towards RMB globalisation. We believe that a sizeable depreciation would do much more harm to the internationalisation efforts than it would in benefitting the country’s export drive. This currency backing should support Chinese credit going forward.
In addition to the currency theme, structural reforms in China will be a key topic to look out for. Although being generally perceived as mid-to-long-term positive, the reform agenda also possesses some risks. The target of deleveraging and economic liberalisation might put some pressure on the financial system which needs to be watched closely.
Renminbi's increasing importance
A key player will be the People’s Bank of China (PBoC). With the bank’s track record of insufficient fine tuning in 2013, notably the liquidity issue and the overshooting of short-term rates in June 2013, it seems to have adapted its strategy in 2014.
This recent adjustment in monetary measures should also be seen in light of the government’s intention to implement reforms while keeping a growth target of 7.5%. A supportive PBoC is important in achieving this target.
In general, we remain positive on the course China is pursuing in terms of currency development and structural reforms. Hence, it might be the right time to rethink EM debt allocation, giving the Chinese renminbi a role that reflects its growing importance.
