China: A Stable and “Slightly” Strong RMB

Published on December 1, 2015

The Executive Board of the International Monetary Fund announced yesterday as widely anticipated that the Chinese Renminbi (RMB) will be included as the fifth currency in its Special Drawing Rights (SDR) currency basket beginning October 1, 2016.


And as night follows day, the formal announcement of Beijing’s prized RMB inclusion in the IMF basket quickly triggered speculation in the blogosphere and on commentary sites that the Chinese leadership will now be free to pursue its “secret goal” of devaluing the currency.


*** That speculation of an imminent RMB devaluation continues to be wildly off the mark. As we have written on numerous occasions, a strong and stable RMB, or what Chinese officials now describe as a “stable and slightly strong” currency, is a policy objective coming straight from the top leadership in Beijing. That policy will apply not only through the remainder of 2015, but all of 2016, a message that was underscored as recently as last week by Premier Li Keqiang himself in a discussion of currency policy with a group of party leaders in Shanghai. ***


“V” is for Victory


While yesterday’s inclusion of the Chinese RMB in the IMF SDR basket was widely expected, what was less clear to markets was the proportion weighting that would be allocated to the Chinese currency in the basket.


Some news articles had inaccurately pointed to an old IMF study to conclude the allocation to the RMB could be as high as 14%, a rate that would have leapfrogged the Chinese currency 5 percentage points higher than the old Japanese Yen quota and 3 percentage points over the Pound Sterling.


But what we had heard was that Beijing was in fact more realistically lobbying hard behind the scenes to get the RMB allocation to as high as 10% (see SGH 11/23/15, “China: RMB “Stable to Strong” through 2016″).


And so the final allocation of 10.92% to the RMB, which will be mostly freed up from the Euro (down 7% points), and Pound Sterling (down 3% points), was an unmitigated political victory for President Xi Jinping, and most certainly not a disappointment as some analysts seem to suggest.


And like the misplaced speculation over the basket weighting, the market speculation that the IMF decision will now free the Chinese leadership to pursue a devaluation policy is also wildly off the mark.


Premier Li’s FX Comments in Shanghai


To underscore that point, Premier Li Keqiang is reported to have discussed currency policy on a trip last week to inspect the Shanghai Free Trade Zone with local leaders and Shanghai Party Secretary Han Zheng.


Li is reported to have told the Shanghai leaders not to expect the State Council to stimulate exports through RMB depreciation, a policy that is not in line with the direction of China’s structural adjustment.


Li further went on to say that the RMB should be kept relatively stable in the future, and that he indeed thinks and hopes the RMB’s value relative to the dollar will be kept “stable or slightly strong”  from the beginning of 2016 to the end of the year, allowing for some two-way volatility through the course of the year.


From what we understand Shanghai Party Secretary Han then dutifully and enthusiastically agreed with the Premier, adding that the enterprises in the Shanghai and the Shanghai FTZ were indeed hoping the RMB would remain stable, and noting the difficulty in receiving standing orders if markets continuously had to speculate or were expecting a devaluation in the currency.


Li is reported to have then further underscored his point, adding “a continuous depreciation will not only bring more harm than benefit to our foreign trade enterprises, but it will harm our economy.”


Senior Chinese official acknowledge that many domestic economists in addition to the financial markets are advocating for a further depreciation in the RMB next year. But they repeat that both Li and President Xi Jinping do not accept that proposition.


Beijing believes that if the RMB were to continue to depreciate next year following the 3% “central parity reform-led” depreciation of August this year China’s currency and economic policies would lose a great deal of all-important confidence and credibility.


It would negatively impact China’s “One Belt, One Road” strategy of regional economic cooperation, and damage China’s reputation, especially in the developing world.


The leadership further stress that currency depreciation on their end could well lead to competitive devaluations from other countries, and note that both the President and Premier have pledged on numerous occasions to their counterparts since August they will not initiate a further devaluation.


China, they continue to stress, is not willing to see a “currency war” happen anytime soon, and certainly not one which its own leaders expect would ultimately bring more harm than benefit to China.

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