In a recent CQS Insights report, QE Chinese style, author Bunt Ghosh argued that many investors expect the Yuan to be devalued in correlation with the slowing Chinese economy.
However, Mr Ghosh said this argument misses “the significant strategic considerations that currently drive Chinese economic policy.”
Namely, the liberalisation of the Yuan is a “central plank” of the People’s Bank of China's (PBoC) economic plan.
With the International Monetary Fund (IMF) due to consider whether the special drawing rights (SDR) basket needs to be widened – and the Renminbi to be included in the new weighting structure – a significant devaluation of the Yuan may jeopardise that objective.
“The importance of this policy goal has to be considered in the context of China’s long-term strategic plan for greater leadership of the global economy,” said Mr Ghosh.
Mr Ghosh also pointed out that critical structural reforms – such as local authority finance reform, rural land ownership reform, and the privatisation of state-owned enterprises – would be more difficult to implement if the currency is weakened.
“We believe a devaluation of the currency does not suit the country’s strategic agenda,” he said.
The report explained that while investors should expect Chinese quantitative easing and further cuts to interest rates to proceed – these are not a precursor to currency devaluation.
Chinese QE is aimed at reversing substantial tightening evident since 2008/2009.
Moreover, “This policy stance is aimed at unwinding the tightening due to quantitative easing (QE) policies elsewhere and falling inflation,” Mr Ghosh said.
As a result, “China’s fixed income and equity markets are likely continue to benefit from lower rates,” Mr Ghosh said.
According to CQS, once investors become less concerned with currency devaluation, and start looking at the internationalisation of the Renminbi as a matter of when, not if, there will be a significant flow of capital into the Chinese market.
