The Shanghai Composite Index has finally ended its losing streak after posting 0.4% gains late in yesterday’s session to close higher for the first time in 3 days. This benchmark indicator of Chinese stocks had fallen consistently since the beginning of the week to record losses of 4.9% overall.
More notable however has been the reaction of the Chinese Renminbi, this currency has a long history of slow and steady strengthening, with the Peoples Bank of China (PBoC) keeping a very close peg to the US Dollar on the downside. The Chinese currency has however been allowed to depreciate, albeit very subtly, over the course of the last week. The PBoC appears to be yielding to market pressure and allowing a little more ‘give’ in this traditionally tightly supported currency.
Both the CNH (offshore) and CNY (onshore) are becoming increasingly correlated to other major Asian currencies as China’s economic prospects become increasingly tied to that of the APAC region as a whole.
This is leading to speculation that the Chinese authorities may be about to enable significantly greater ‘two way volatility’ in their currency. The question however arises as to whether they will give up foreign exchange intervention altogether and allow the currency to float freely. This is not an unlikely prospect as recent events and statements have clearly shown that China is adapting a more modern approach to management of it’s economy. This has been evidenced by its reconfiguration of credit controls and a demonstrated willingness to take the hard decisions in order to secure a more stable growth rate.
The actions taken by the PBoC to curtail credit, particularly in the housing markets, will have the effect of dampening domestic Chinese demand. In order to compensate for this it is not unreasonable to suggest that a Renminbi depreciation would be considered. This is new territory for China and somewhat of a double-edged sword. The goal of a greater economic contribution from foreign trade in the world’s second largest economy may well come at the expense of higher raw material costs. China will need falling global commodity prices in order to make this a reality.
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