There was champagne on offer at 9am in Hong Kong last week for the big launch of the Bond Connect trading scheme with the mainland — but I’m waiting for a bottle of wine I’m owed by a colleague.
The wine is the outcome of a bet I wrote about in December that China would not announce a single sweeping devaluation of the renminbi in the first half of this year. Back then, speculation about a move — of say, 10 per cent or more — swirled around the markets as the currency slid towards Rmb7 to the dollar at a surprisingly fast pace.
Yet over the past month, the renminbi has been noticeable only by its absence from discussions about China, even as the country managed two big markets milestones. In that time, Chinese stocks have won their first-ever inclusion in an international benchmark index and Hong Kong launched Bond Connect, linking foreign investors sitting offshore directly to the mainland’s vast debt markets — also a first.
Back in January, analysts’ consensus forecasts for the renminbi put it at Rmb7.14 against the dollar by the end of this year, according to Bloomberg. Now, those predictions have coalesced around Rmb6.95 — in other words, virtually unchanged from where it began 2017.
In fact this year the renminbi is up about 2 per cent against the dollar. At Rmb6.78 on Thursday, it was hovering near its strongest level since early November. To boot, the offshore rate, which is not subject to the same daily limits as its onshore cousin, has spent much of 2017 trading at a stronger level than the latter — reversing the weakening signals sent through most of 2016 when the softer offshore rate was considered a harbinger of declines to come.
So where next? The lack of headline drama around the currency’s actual level and near-term direction belies the fact there has been a lot going on under the surface. Last month the People’s Bank of China caused consternation among traders and investors when it appeared to intervene directly in the market, sending the renminbi sharply higher for no clear reason. In May, the central bank changed the way it fixes the midpoint for the daily onshore trading range to allow it greater pushback against what it considers to be irrational market expectations. The upshot is a currency subject to conflicting forces.
”At the end of the day the China story is still in general a domestic story — the domestic market plays a very important role in overall Chinese policy design,” says Hao Zhou, senior emerging markets economist at Commerzbank. “But on the other hand the FX story is also related to overall capital flows.”
China’s capital outflows have dried up in recent months, reflecting tighter controls that it introduced last year. While Beijing has eased curbs on cross-border renminbi payments as a result, it has clamped down on the high-spending habits of its more acquisitive companies overseas. Then there is its battle at home to curb and ultimately remove leverage from the financial system, which has pushed borrowing costs close to two-year highs. That should strengthen the renminbi — but does that really have an effect when capital cannot flow freely?
There is also the main reason I gave for betting against devaluation in December — China’s desire for financial stability as it heads into its 19th Congress and an all-important power reshuffle in the autumn.
“One fairly consistent pattern ahead of past meetings has been a strong political incentive to keep policy fairly easy and growth afloat,” wrote Goldman’s Asia economics team to clients this week.
All of which suggests that China watchers are wary of emphasising one single factor as they wait to see what Beijing actually does — which an increasing number believe is itself an aim of the authorities.
“The PBoC doesn’t want you to know what it is thinking,” says one observer, comparing it to the western policymakers’ emphasis on guiding markets. “The moment you think you do, they will want to change just to keep you guessing.”
In that light I consider the timing of my wine bet more fortuitous than far-sighted. The most prudent thing I could do now is collect on the wager — in wine, as promised. Not in renminbi.