24 May 2019
Mainland Chinese may find it hard to believe official pronouncements on the direction of the renminbi, as in the past, the opposite of what they predicted has come to pass. Photo: HKEJ
Mainland Chinese may find it hard to believe official pronouncements on the direction of the renminbi, as in the past, the opposite of what they predicted has come to pass. Photo: HKEJ

Why official word on RMB decline provokes skepticism

The mainland stock markets are being dragged down on one side by weak investor confidence amid a decelerating economy and on the other side by overseas short sellers of the renminbi.

Unlike what the government usually does to save the market, the “national team” has switched its focus from buying heavyweight stocks to supporting the renminbi exchange rate.

Maybe the authorities have realized that if the renminbi continues to weaken, overseas and domestic investors will tend to hold more US dollar assets.

In the long term, that will harm China’s economy and stock markets.

Normally, when a currency depreciates, asset prices will increase, and that should benefit the stock market.

But, what happens in the mainland is the opposite — as the renminbi depreciates, stock markets are falling at a faster pace.

It means investors are not confident about mainland-listed companies in the first place, and the depreciation of the currency has made them even less attractive.

After the government stopped the dive in the offshore renminbi exchange rate, the stock market calmed down for a while.

However, the market consensus is that weakness in the renminbi will continue in the intermediate and long term.

Thus, there is no reason for capital outflows to stop.

In past years, the trend in the renminbi exchange rate was always the opposite of what the government promised it would be.

About 10 years ago, the United States repeatedly asked China to allow the renminbi to appreciate.

But the then premier, Wen Jiabao, said publicly several times that the renminbi should not appreciate, because that would harm companies that bought Chinese products.

Nonetheless, the renminbi strengthened.

Even in the past year, when expectations that the US Federal Reserve would raise interest rates and that the renminbi would depreciate became stronger, senior mainland officials insisted there weren’t any fundamental reasons for the currency to weaken.

Well, Beijing allowed the renminbi to fall nearly 3 percent against the US dollar in August, and then, in the first week of this year, the Chinese currency weakened about 2 percent.

It is beginning to look as though what the officials say is usually the opposite of what happens.

Is this because the government isn’t powerful enough to control the trend or because it was trying to comfort the citizens?

If it is because it is not powerful enough, the perception that the Chinese government controls the renminbi exchange rate has been proven false.

Neither an uptrend nor a downtrend can be controlled by the authorities.

But if the officials are trying to comfort the people, that is not a smart move.

Investors have long been expecting a devaluation in the renminbi, so an ambiguous official response only increases uncertainty. High uncertainty in the market will drive away investors.

China’s import and export sector is closely linked to the renminbi exchange rate.

In past years, as there was a one-sided expectation that the renminbi would appreciate, exchange rate changes didn’t have a big impact on the sector.

But as exporters didn’t prepare enough for the risk of a devaluation, many have suffered big losses.

So what the Chinese government should do is not only intervene in the offshore exchange rate but also manage market expectations.

Avoiding panic in the capital markets is key to the development of the mainland stock markets and the economy.

This article appeared in the Hong Kong Economic Journal on Jan. 15.

Translation by Myssie You

[Chinese version 中文版]

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HKEJ columnist

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