外贸英语：Is the renminbi set to slump

Emerging market (EM) currencies have tumbled against the US dollar over the past three months – with a single exception. Not only has the renminbi resisted kowtowing to the resurgent greenback, it has strengthened against it even as the

currencies of its BRIC counterparts – the real, the rouble and the rupee – have fallen 7.8 per cent, 14.3 per cent and 1.6 per cent respectively since July.

This raises an obvious question: for how long can the renminbi refuse to accept the US dollar renaissance?

For some, the answer is straightforward. Charles Dumas, chief economist at Lombard Street Research, thinks the renminbi must be cut loose from its moorings if China is to boost exports – its only available palliative to offset the impact of a slowing economy.

The urgency of the situation is shown, Dumas says, when the renminbi’s value is judged against a basket of its main trading partner’s currencies – the so-called “trade weighted” index (see blue line in the chart below). This index shows the renminbi appreciating particularly sharply since mid-2014, undercutting China’s overall export competitiveness.

Beijing manages the currency’s so-called “float” – so its views are key. Dumas sees China’s fixed asset investment (FAI), which last year contributed 48 per cent of GDP, fading in line with Beijing’s attempts to re-orientate the economy away from an over-reliance on infrastructure, property and capital goods investments.

“When 48 per cent of GDP slows, so does household income, eroding hopes for consumer growth in the short term,” Dumas said in a research note. “So export growth is the only palliative.”

“China needs to keep growth up while getting excessive investment down, if only to avoid delaying for too long the moment when consumer spending comes to lead the economy,” he added. “The bridge to the desired result has to be greater net exports.”

But China’s current account is strong – or is it?

But does China really need to boost its export competitiveness? Its trade surplus hit record totals of $49.8bn in August, up 77.8 per cent year on year, and $47.3bn in July – suggesting that things have never been better.

Yet closer inspection reveals a sta rkly different picture. While China’s trade surplus is strong, its service account is plunging deeper into deficit, resulting in a shrinking current account surplus. In the first half of 2014, the current account surplus was US$80.4bn, down from $98.5bn in the first half of 2013.

The two big ticket items that contribute to the services deficit (which hit US$62.5bn in the first half of this year, up from US$55.2bn in the same 2013 period) are outbound tourism and shipping costs. Of the two, the outbound tourists – which this year are expected to take well over 100m trips overseas – are the bigger factor ,

responsible for net outflows of $44bn in the first half, according to the State Administration of Foreign Exchange.

The chart below, from Dragonomics, a Beijing-based consultancy, shows that if these trends persist, China’s much-vaunted current account surplus could quickly fade.

In addition, there are questions over the reliability of China’s recent export surge, following a survey by China Confidential which suggested that over-invoicing of exports is on the rise again. This fraud, which involves falsifying export invoices in order to bring “hot money” into the Chinese economy, has the impact of inflating export statistics.

But China needs to keep the renminbi stable to “internationalise” it

It may be, however, that trade and economic growth may not be Beijing’s top priority. Au King Lun, chief executive officer at BOCHK Asset Management, said that a strong stable currency is essential in winning the renminbi acceptance as a unit of exchange and a store of value internationally.

“What China is going for is a stable currency because the internationalisation of the renminbi depends on the stability of the currency,” Au said, noting that Beijing resisted devaluing the renminbi during the Asian financial crisis of the late 1990s. Au added that strong investment inflows into Hong Kong dim sum bonds, which are denominated in offshore renminbi, are evidence that portfolio investors still expect renminbi strength.

Xavier Hovasse, portfolio manager at Carmignac, a Paris-based fund, said that it was beyond dispute that pressure on the renmimbi is intensifying in the current strong dollar environment. However, Beijing’s intention to popularise the renminbi internationally demanded that it reduces the currency’s volatility against the US dollar and other hard currencies.

“Our base case scenario is for the gradual depreciation of the renminbi,” Hovasse said.

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