As for China, and the doom scenarios about it, here's a chart of the renminbi US dollar exchange over the past 12 months:
No doom there, although the 7% appreciation in 2007 is a fair way short of the euro’s 15%.
In August 2015, the Chinese currency devalued 4.5% and caused a global panic about the possibility of deflation. It continued devaluing last year and bottomed around Christmas 2016. The 7% rise since then is a lot for a managed currency.
And that is the point. Beijing’s Marxist control freaks are unlikely to have converted to being free market fundamentalists: the renminbi is rising because they want it to.
Currency weakness has been one of the fundamental pillars of China’s economic policies, so the opposite is worth looking into.
There are three possible explanations:
- Xi Jinping is trying to help Donald Trump and head off any protectionist measures he might do, especially as part of the North Korea problem. That’s possible but Trump is not only looking increasingly hapless, he’s focusing on Mexico and Canada at the moment.
- The PBoC and the Government are using currency strength to cool down the domestic economy.
- The Communist Party is using the currency to support its One Belt One Road initiative, and its imperialist ambitions for the region, and specifically to encourage other developing countries to move capital into renminbi assets.
It’s most likely to be a combination of all three, as the Chinese leadership prepares for next month’s 19th Party Congress.
If the third point is correct, and perhaps even the main one, then the process of renminbi appreciation has a long way to go.
Which makes this a turning point for the world economy. It means a lot more trade and investment is likely to move into the Chinese currency and it will be another factor weighing on global inflation.
The Constant Investor is the new home of Alan Kohler, founder of Eureka Report and the ABC's finance presenter. Join to receive - Kohler's Weekly Overview, exclusive stock tips, investment ideas, podcasts and much more. Click here to learn more.