CHINESE YUAN – CURRENCY FOR THE EMERGING MARKETS?

APR9_13
Contrarian economist Shan Saeed has been supremely optimistic on the Chinese currency for years. Which direction is it heading in light of current events?

On Jan 7, 2011, standing in front of 200 investors in New York, I was talking about the Chinese Yuan. Investors thought I might be daydreaming as Chinese yuan would never get a lift-off. Time is the best judge. Yuan is now on the lips of most savvy investors and moving aggressively in gathering momentum to have a global market share. Already, the Chinese government has signed currency swap agreements with more than 97 countries globally including Switzerland, Pakistan, Singapore, Malaysia, Russia, Saudi Arabia, Canada and Australia to make yuan acceptable in the global financial markets. Financial centers like London, Hong Kong, Singapore, Luxemburg, Kuala Lumpur and Shanghai are witnessing more interest in renminbi than any other currency in the global financial market. So, where is the Yuan heading? Lets analyse: Yuan will gain further strength once the capital controls are removed which is expected within 2- 3 years moving forward. Yuan has gained 34% against the USD in the last 7 years and very few financial experts are aware of this fact. China’s central bank PBOC surprised the markets on 11th August when it devalued the yuan, by lowering its daily mid-point trading price to 1.87% weaker against the US dollar. A day later, the central bank pushed down the price by another 1.62%.

Screen Shot 2016-01-21 at 6.44.55 PMI can foresee more currency depreciation in the coming rocky months of 2016 from many decision-makers. Nobody wants to lose her trade competitiveness in these turbulent times. I see policy shift coming from advanced nations to keep their economies on a stimulus growth path next year. I am quite positive about Chinese Yuan’s role in the global financial markets in the next 2 years. Hence, happy investing in the Chinese Yuan.

With regards to its impact on property demand, I foresee continued strong interest from Chinese investors globally irrespective of the yuan’s performance. This is due to many other factors at play. As such, the impact of the yuan’s devaluation is quite negligible in terms of demand by the Chinese for properties worldwide.”

Ed’s Note: Just before going for print, the yuan has weakened further after the People’s Bank of China fixed the yuan’s value against the US dollar at a weaker level each day this year, as per the Wall Street Journal. While investors had expected the central bank to allow the currency to fall further amid slowing economic growth in China, the pace of the drop has spooked markets. This is especially so after China’s stock markets shut down for over an hour in the first week of 2016, sparking a sell-off in stocks and currencies worldwide. Coming at a time when the US is raising interest rates, there is widespread anxiety over capital flight from China and further weakening of the yuan which is likely to trigger competitive devaluations among its trading partners. It was only late last year that the International Monetary Fund had included the yuan in its reserve currency basket. Some analysts believe the yuan will go on to become the third most powerful currency in the world. In my view, the current yuan weakness may not last and in the long-term, the currency may even achieve a similar status as the US dollar.

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