RAOUL PAL: China's currency peg doesn't make sense for the economy

Business Insider recently asked the smartest people in finance for what they considered to be the
“most important charts in the world” right now.

Former global macro fund manager Raoul Pal sent us a chart of the Chinese currency as represented by the offshore RMB (inverted).

Pal, who is author of The Global Macro Investor
and founder of
Real Vision Television, thinks that China will have to devalue the Renminbi (RMB) against the dollar or face a major economic slowdown.

“Essentially the Chinese RMB has appreciated over 50% versus the Japanese yen (JPY) and the euro (EUR) due to its dollar peg and the general strength over the last few years (which was encouraged by authorities and led to the $US3 trillion carry trade as Chinese borrowed dollars and played the currency strength),” Pal wrote in an email to Business Insider.

Pal can’t reconcile why China continues to peg its currency to the dollar, which has been strengthening. China’s economy is weak. It’s an export-led economy, and exports are falling. The economy needs a weaker currency to make its exports cheaper for its international customers.

Here’s the RMB surging against the euro.

Here it is surging against the yen.

“The RMB’s peg to the USD now does not make sense as Chinese exports are falling (due to the lack of competitiveness — wages in China have gone up significantly too), GDP is falling (because of exports and the debt burden caused by the massive over investment boom) and thus the Chinese are having to cut interest rates.”

Here’s Chinese exports tumbling.

Here’s GDP.

He continued: “It would be more realistic for the Chinese to unpeg from the dollar and let their currency fall in line with the JPY, EUR, AUD and the other major currencies to regain competitiveness and lessen the deflationary impacts of their strong currency.”

Perhaps this is the big policy move that will get China’s slowing economy growing more robustly again.

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