Risk of China currency intervention growing, Heartwood says

Added 31st May 2016

China's currency depreciation trend playing out in 2016 looks set to continue, according to Jade Fu, investment manager at Heartwood Investment Management.

Risk of China currency intervention growing, Heartwood says

This week China’s central bank fixed the daily reference rate at the lowest point in five years. While markets seemed largely unmoved by that, concerns are growing that the prospect of higher US interest rates will test the Chinese central bank’s policy of managing its currency, Fu said. 

There is a risk that People’s Bank of China could make another one-off intervention to depreciate the renminbi alongside the rise in the US dollar, Fu added.

Such a scenario could be avoided with a controlled gradual depreciation of the renminbi, allowing markets the time to accept the presence of a devalued renminbi. A slower depreciation of the renminbi would also give policymakers time to achieve the broader strategic objective of integrating China’s economy into the global financial system, and perhaps gain the renminbi international currency reserve status, in Fu's view.

"Indeed, the renminbi’s inclusion in the International Monetary Fund’s Special Drawing Right in December 2015 represented an important step toward China’s currency assuming international currency reserve status," commented Fu.

Heartwood expects the renminbi to be increasingly viewed as an alternative to the dollar in Asia, as China's domestic market infrastructure is being developed, creating deeper and more liquid local bond and equity markets.

"Our long-held view has been that the Chinese authorities are not looking to aggressively depreciate the renminbi and spark a currency war to boost China’s export sector, which would risk both severe capital flight and economic instability," said Fu.

There has also been a change of tactic from the Chinese authorities in terms of improvement in the transparency of policymakers’ communications with markets in their efforts to avoid unwanted surprises (as seen in August 2015 and January 2016), which seem to be working, noted Fu.

While the authorities appear to be moving away from currency interventions, Heartwood's Fu said that China's policy of gradual currency depreciation has been playing out in 2016. "We expect that this trend will continue and also believe that China’s currency performance will be assessed not just exclusively against the US dollar, but also versus a broader range of currencies," she added.

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