Li Keqiang, China’s premier, stated on Thursday that China’s currency, the renminbi, will remain stable, noting that there was no basis for a long term depreciation of its value given it would not help Chinese firms become more competitive.
The remarks echoed those from Zhou Xiaochuan, the governor of the People’s Bank of China, who remarked in February that the bank’s aim was to have the renminbi broadly stable at an adaptive and equilibrium level.
The comforting words from Zhou were welcomed by financial markets who had been stressing about a large scale devaluation of the currency, helping to spur a recovery in risk assets over recent weeks.
However, while the long term goal from Chinese policymakers is a stable currency, on current form the renminbi is anything but. It’s actually weakening against a whole raft of major currencies.
The chart below, supplied by the NAB, reveals the recent movements in the renminbi against the China Foreign Exchange Trading Systems (CFETS) basket of currencies. Unlike the USD/CNY exchange rate that markets continue to use to gauge the renminbi’s strength, this tracks its value compared to a whole variety of currencies such as the euro, yen, pound and Australian dollar, among others.
While the renminbi has been strengthening against the US dollar in recent weeks, clearly that has not been the case against other currencies in the CFETS basket. It has been weakening, and fast.
“Since the start of the year, the CFETS RMB index has fallen from 100.89 to 99.61 at the start of March to 98.05 on March 18, with the rate of decline having increased significantly,” wrote the NAB’s FX strategy team.
“At this juncture it is still unclear whether the authorities are managing the RMB Index on a downward trajectory or whether it is being guided to a lower level where it will be kept fairly flat. At the moment, the latter scenario seems to be playing out.”
While the NAB suggests the recent weakness in the renminbi against the CFETS basket will eventually end, leaving the currency stable at lower levels, at what level that will be remains anyone guess.
Nobody knows how long it will last, nor how steep the devaluation will be. All we know is that it’s happening at a time when its supposedly meant to be stable.