The Chinese Renminbi has been approved by the IMF to be a part of the basket of currencies that make up the Special Drawing Rights (SDR). The other currencies include the US Dollar, the English Pound, the Japanese Yen and the Euro. What is most surprising about this move is that the yuan now makes up more of the basket (10.92%) than the Yen (8.33%) and the Pound (8.09%).
In order to get the yuan included, china has had to make economic reforms and open up transparency to its central bank. It also has had to devalue the yuan (vs UAD) as well as cut interest rates (6 times) in order to promote economic stability as it transitions from an export driven economy to a consumer led economy. China’s central bank allows the yuan to float in a very tight predetermined ranged versus the USD. On August 11th as the chart below shows, China allowed the yuan to depreciate by its widest margin vs USD as part of ongoing efforts of monetary reforms and easing to help an economic slowdown. This triggered an even sharper selloff in the yuan as global investors started to worry about a Chinese meltdown, which has not come to fruition.
It was widely accepted that the PBOC manipulates the value of renminbi and that its overvalued. In a recent article from MarketWatch a prominent investor had this to say:
“The slowdown has also dimmed investor enthusiasm for the yuan. Mr. Zhou of Bin Yuan Capital said the yuan is overvalued by about 20% and keeping it at the current level would only hurt the economy. In a Nov. 19 report, Goldman Sachs Group Inc. listed a “significant depreciation” of the yuan as the biggest risk facing emerging-market assets next year. A drop could help China’s export sector but raise new criticism from the U.S. and elsewhere that Beijing is playing politics with its currency.”
Banc of America’s Richard Woo has made an even bolder prediction:
“After the SDR they no longer have the incentive to prop up the renminbi,” he said Friday in an interview in Taipei. “A December hike by the Fed would give the Chinese a perfect excuse to let the renminbi go because they can make a strong case that they need to decouple their monetary policy from that of the U.S.”
Supporting the yuan by keep it in a narrow band vs USD (and overvalued) has cost the Chinese greatly in FX reserves and has become unsustainable policy moving forward as China seeks to open up and become a global power.
Bullish For Bitcoin
Regardless of whether the yuan is overvalued by 20% or will be let go from its informal peg, it is clear that the Chinese are moving in the direction of letting the yuan float freer. This effects onshore yuan holders dramatically and as the currency is less controlled by the China, market forces will determine its true value. It’s time to expect further weakening of the renminbi vs USD. The Chinese authorities have instituted capital controls in an effort to stem money leaving the mainland as has been mentioned in blog posts in the past. One of the ways, Chinese have been able to avoid these controls and get their money/assets offshore and out of yuan has been through bitcoin. Expect for this to continue, particularly as the yuan begins its depreciation vs USD, and the purchasing power of the average citizen and the super rich begins to erode.
China has led the bitcoin market both higher and lower and continues to lead the market. Therefore any policies coming out of China should be watched closely and followed; particularly those that affect the people’s ability to move capital freely. Anything that depreciates the onshore yuan (like a freer floating currency vs USD), should cause Chinese investors to move assets into vehicles that get their money offshore. If the bitcoin price begins to climb as a result, speculators will pile in as well.
First published on sammantics.com