China’s move to devalue the renminbi should not be looked at as a competitive devaluation but rather a move to deleverage and reform the economy, says AllianceBernstein (AB).
In a recent report – China: What’s really behind the currency move? – AB argued that the devaluation of the renminbi wasn't implemented to shore up the country's exports as widely suggested.
Report author and director of Asia-Pacific fixed income Hayden Briscoe said the best explanation for the devaluation was to bring the renminbi valuation in line with that of the market.
“A more market-orientated currency is, of course, essential to China achieving its broad policy objective of modernising the economy and opening it to foreign and domestic private investment,” Mr Briscoe said.
Mr Briscoe argued that the devaluation was not competitive as it “would hurt, not help”.
Although China’s exports fell 8.3 per cent year-on-year in July, the drop was less severe than the double-digit fall experienced by other countries in the region.
“The drop did little harm to China’s balance of payments because imports are falling even more quickly than exports, leaving the country’s trade in a net positive position,” Mr Briscoe said.
Moreover, Mr Briscoe argued that the devaluation was not competitive due to potential political ramifications.
China’s President Xi Jinping is due to meet President Obama in September to discuss bilateral trade. The US Senate has long held concerns that China has “artificially” kept the renminbi undervalued.
“To devalue now, just a few weeks before the meeting, would look politically inept at the very least,” Mr Briscoe said.
“The Chinese president has another reason for keeping on the good side of his US counterpart: China wants the RMB to be included in the Special Drawing Rights (SDR) basket of the International Monetary Fund, and President Obama’s goodwill could be helpful in that respect.
“In light of these considerations, we believe that the best explanation of the adjustment in the central parity rate was the one given by the People’s Bank of China: that it was intended to close the unusually wide gap that had opened between the fix and the spot price – in other words, to bring to RMB’s valuation more in line with that of the market.”
Mr Briscoe added that when looking at China, investors need a deep understanding of the country’s internal politics, macroeconomics, cultural differences with the West, and importantly the country's impact on global capital markets.