Who still understands the Chinese currency plans?

For years, China has been trying to force the renminbi to play a greater role in the currency world. However, as long as the priority is to protect domestic economic growth, that will be a long story.

In the Netherlands we are often only a little proud of the polder model. If all parties involved sit down at the table and deliberate long enough, a compromise is always reached in the end. At least if the problem hasn't solved itself in the meantime. It is very different in China. If the government wants a bridge to be built somewhere or a new city to be built, this usually happens within a few months or at most years. Prime Minister Xi Jinping notes, however, that goals are a lot harder to achieve when he has to deal with things he has no control over. The Chinese efforts to force the renminbi into a more prominent place on the world stage are a good example of this.

Game of speculators
In 2015, China set itself the goal of making the renminbi a freely tradable currency and widely accepted means of payment by 2020. Although the room to move against the dollar has increased slightly, Jinping still has a firm grip on the reins of the renminbi. He put it back on again last week. The percentage of foreign currencies that Chinese banks are required to hold as reserves with the People's Bank of China (PBoC) was increased from 5 to 7%. Of the $1 trillion leeway that local banks have, approximately $20 billion extra will remain on the sidelines as a result of this measure. However, the amount of the extra reserves is less important than the signal sent by the measure. The renminbi should not become the plaything of speculators. Not yet.

To set priorities
It is the first time since 2007 that China is going to put the currency brake on in this way. It appears that it is a temporary measure to halt the advance of the renminbi. In the past twelve months, the currency has appreciated by 12% against the dollar. As a result, Chinese goods are becoming increasingly expensive abroad. This jeopardizes the industrial recovery that is emerging after the peak of the corona pandemic. China therefore chooses to give the export sector a boost. Even at the expense of higher prices for iron ore and other increasingly expensive industrial raw materials and the status of the renminbi.

Patience
In the long term, it is still obvious that the renminbi will play a freer role. This is inextricably linked to the further maturing of the Chinese economy. But for now, those in power attach more importance to protecting that economy as much as possible against external shocks than to creating a greater role for the renminbi in the currency world. That is good for currency speculators to know. Although the increase in reserves for banks is a small measure, history shows that China is not afraid to go very far in this regard. In 2017, the country temporarily introduced capital controls to stem the large outflow of liquidity. If you want to respond to a further advance of the renminbi, it is better to be patient for the time being.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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