The RMB to top out at 6 to the dollar?on Thursday, 14 July 2011. Posted in Economic Commentary, Emerging Markets, Investing in China, Investments, Market Flash
Only 2 years to go?
We don’t think so.
Yes, a consistent appreciation in the RMB is a good bet for the next year or so. We believe its unlikely the RMB will get much past 5.9 to a US dollar. We think the gradual increase in the currency is already having an impact on trade flows and competitiveness, but most powerfully, we think higher rates of inflation in China are reducing the value of the RMB quicker than the current revaluation. We think that the RMB might only appreciate for around another 2 years.
Here are our main reasons.
- High Chinese Inflation – Food and Energy prices rises have been far quicker than the official inflation rate of 6%. Many have reached 20 or 30% or more. Pork prices for instance have rocketed, energy demand has caused brown-outs. Electricity costs jumped as a result. Many clients and their companies in China decry the rapid increase in the costs of doing business. A public example is McDonalds, a cheap cost-plus food provider that has been forced to raise prices twice in the last 12 months. Taxi prices have also been lifted recently. Everything seems to be rising quickly. What items of goods have been rising more slowly than the average to achieve a rate of 6.4%? It is difficult to see and we believe that government statistics have been managed down to achieve even that relatively high number.
- Strong Income Growth – Wage raises in many factories and workplaces is now running at 20-30% per annum according to many reports and also anecdotal evidence. In some ways this is government supported, to reduce income in-equality between the interior and coastal provinces. Government sanctioned strikes have occurred for foreign car companies, but in general Chinese staff are more demanding. Another factor affecting this process of income growth is that the peak number of school leavers has been reached – universities and factories now face, for the first time, competition for a declining number of new entrants to the workforce. Some have responded by moving factories further west.
- Already Weak US Dollar – On a trade weighted basis, the US dollar is already very weak – at a 30 year low as the chart shows. Being pegged to this weak currency has helped China’s export areas compete in global markets, but US manufacturers have recently shown strength, probably on the back of a weaker dollar for exports since domestic demand which is still very weak, is unlikely to be the reason. The US dollar may get weaker, possibly due to some self-inflicted political instability, but chances are good that the US dollar will lift from its present situation. The US dollar can’t go down forever anymore than the RMB can go up forever.
- Inflation in US – Has only recently managed to get to 3% and that was on the back of a spike in oil and gas prices in the most recent quarter and inflation has been much more in the 1-2% range. This is a hefty gap to Chinese headline rate of 6% and probably 9-10% actual rate.
- China ’s import growth – China may still run a trade surplus but Chinese imports have been growing faster than exports since 2007. This means that China has become somewhat less competitive. Here is what the World Bank’s says about Chinese trade.
“There is another side to China’s external trade story. China’s domestic economy grew even faster than exports since 2007 and China’s imports surged alongside domestic demand. As a result, imports strongly outpaced exports, with import volumes 34% higher in 2010 than in 2007, in real terms, compared to a 24 % increase in export volumes. This has basically driven the decline in the current account surplus from 10.1% of GDP in 2007 to 5.1% in 2010, leading to external rebalancing simply because China grew much faster than the rest of the world. In the first 4 months of this year, import volume growth eased but to a still steady pace.Caterer Goodman, China, CNY, Money, Owen, Owen Caterer, RMB