GaveKal Answers "How Low Can The Renminbi Go"

Tyler Durden's picture

From Chen Long of Evergreen GaveKal

Renminbi Limbo: How Low Can It Go?

As we argued last week, the recent depreciation of the Chinese currency was engineered by the central bank—not as a competitive devaluation, but rather to rout speculators making one-way bets on renminbi appreciation. The People’s Bank of China (PBC) acted after January saw roughly US$73bn in net capital inflows, the biggest deluge of inward flows in 12 months. The question now, after a 1.4%fall in the renminbi in 10 trading days (a bigger fall, admittedly, than we anticipated), is just how far will the PBC go to prove its point? In our view, not much farther, because Beijing recognizes the risk of sparking a broader loss of confidence.

First, a quick reminder of how Chinese currency management works. Since 2005, the PBC has been managing the renminbi (RMB) gradually upward against the US dollar, at an annual rate of about 5% a year through the end of 2011 (except for a hiatus during the global financial crisis), and a slower pace of around 2-3% since 2012. The RMB is allowed to trade 1% below or above a “central parity rate” which the PBC sets daily. From September 2012 until a week ago, the spot RMB rate continuously traded above the parity rate— usually, quite close to the 1% limit. This limit-up trading reflected the view that the RMB was a one-way appreciation bet.

Two weeks ago, the PBC made an unusually large downward adjustment in its parity rate, and this triggered an even steeper selloff in the spot market. The cumulative weakening in PBC’s central parity has been 183 pips (from 6.1053 to 6.126), while the spot market adjustment has been 850 pips (from 6.0645 to 6.1495, a decline of 1.4%). In 10 trading days the RMB has erased all its gains since last May, and the spot rate has started to trade below parity for the first time in almost 18 months (see chart on page two).

How much farther will the RMB fall? At the outer limit, perhaps as low as 6.24, but probably much less. The reasoning is as follows. Right now the spot market is trading 0.4% weaker than the central parity. So without any further move by PBC to weaken the parity, the limit is 6.18. A move below that would require PBC to adjust the parity further downward. The biggest-ever downward adjustment in the parity was 685 pips, in May 2012. If the PBC matches that move (by adjusting the current parity down another 500 pips), the RMB could fall to 6.24.

But we doubt the parity will move anywhere near that far. First, the PBC has already achieved its goal of punishing speculators, as shown by the spot rate trading below parity. Second, more aggressive depreciation risks a backlash from China’s trading partners who will complain about beggar-thy-neighbor tactics. Third, the depreciation drive carries costs. Beijing’s already massive foreign exchange reserves are building up as state banks have been ordered to purchase dollars. This creates unwanted liquidity in the domestic financial market, at a time when PBC wants to keep liquidity from growing too fast.

The final reason is the risk that a controlled depreciation could morph into uncontrolled capital outflows. Most emerging markets have experienced significant outflows since Ben Bernanke’s tapering hint last May, and China has not proven itself immune: it had outflows in the first three quarters of 2012 (between QE2 and 3) and then again briefly last summer. China’s economic fundamentals are weaker now than in 2012. While it is true that Chinese authorities have enough ammunition to prevent a Turkeystyle meltdown (capital controls and US$3.7 trillion in reserves), sustained outflows can make management of domestic liquidity much more difficult (see [China] Who’s Afraid Of Capital Outflows). At the end of the day, the currency moves are about giving the PBC more room to maneuver in the domestic market, and that aim has been largely achieved.

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zionhead101's picture

Nobody knows how low it will go.

But I know this, and HONG-KONG people have been trying to BUY all the CNY they can for years, as the HKD is tied to the USD.

Should the CNY lose much more than 6.5 THEN the fickel hong-kong 'investors' will run back to the HKD.


Still good bet to hold HKD for westerners as when the USA implodes the HKD becomes CNY.

But in Hong-Kong, its NOT easy to buy CNY(YUAN), which is why everybody wants it,

Like GOLD the CNY has had a damn good 10+ year run and nothing last forever.

But like the british pound it took years to lose it relative value, and the YUAN was 8:1, and now 5.9:1 not much really.


but back in the day the british-lb was good money, the USD hasn't been good money for a 100 years, if ever, and the CNY is as we all know ....


Well it all goes back to what you need not forget, there are only a few real 'AAA' paper money,



Safety probably means holding some USD in the form of HKD, and holding some CNY for fun, and for play maybe some JPY. But for safety its SGD,CHF,NOK. Of course there's gold, but its most likely going down to $1,000 or lower, but not below $800.

CNY was on a ride for past ten years because the Chinese economy selling the world crap, now that's game-over, ...

CNY ain't "AAA", and its NOT a sure thing, on the other hand the USD is '-FFF' and its going into oblivion.

Bindar Dundat's picture

Down another 50% and then back it by gold at $3500 ounce equivient and the CNY will look like the KING of curriencies and the U.S. will be in deeper shit than it is already with the Ruskies.

zionhead101's picture

I agree with you, but I also think that the EURO is going to be rock solid.

I got out of USD 10+ years ago, and I got out of EURO 2+ years ago, ... so I'm happy as a pig in SHIT, but I'm quite surprised at the TENACITY of EUROPE and Germany.

I was long on  DM ( deutsch marks ) from 1970's to 1990's, before they shoved my ass into the EURO.

I always trust GERMAN bankers,... I think the GERMANS are in for the long haul, ... so I think I'll crawl back to the EURO and buy back in at the same price I got out. :(


Problem with the CNY right now is that its still closed in term's of FLUIDITY.

Another thing not mentioned here is that the JPY will probably do better than the USD.

Some here like to BASH the JPY, but let's be honest the JAP's are a hard working collective people, the problem with the USD is the american's are all FSA, and going down.

AUD is interesting the GUBMINT want's to send their money into the toilet,... never fight a gubmint that wants to destroy its own currency.


GOLD is good, and in paper money its the CURRENCY backed by GOLD that are GOOD, and that be SGD, and CHF.

Probably only other subject worth touching is investing, real-estate is best, but the places you want to buy, you can't.


elwind45's picture

The Swiss have a peg at 1.22 Swiss franc to the euro. Benchmarks are better than DM

zionhead101's picture


If they drive the CHF down BUY.

CHF swiss francs best currency on earth, with a 400+ year old history of not being MORONS or IDIOTS, and not letting Foreigners cannibilize their nation and export the loot ...



medium giraffe's picture

So China is stuffed to the gills with foreign FX?  With majors at relative highs, surely devaluing the RMB means that they can buy back more RMB on the cheap.  Wouldn't expect the RMB to drift too far down as this would effect their ability to service debt, and certainly wouldn't be surprised to see a subsequent ramp.  'Punishing speculators'? I'm not sure I buy that, must be more to it.

NOTaREALmerican's picture

Well,  we have a strong dollar policy, so no worries.

oak's picture

'The RMB is allowed to trade 1% below or above a “central parity rate” which the PBC sets daily. From September 2012 until a week ago, the spot RMB rate continuously traded above the parity rate— usually, quite close to the 1% limit". The rumor in China says that the limit of parity rate could be set to 4%.  Just wait and see.

elwind45's picture

Jan. Had a massive inflow and still needed dollars? Or China adjusted its band downward at the time that money was flowing out of EM? So really the question is are they making Yuan or buying dollars?

disabledvet's picture

anyone holding "commie paper" (for lack of a better term) is crazy. What KGB Colonel Putin has just done is total madness and you're gonna say only a couple of currencies that make any sense here...the dollar and the euro are about it right now.

I mean "nothing says liquidity annihilation" more than an unprovoked invasion of a sovereign nation in the heart of Europe.
A good argument can be made that Putin has now destabilized MASSIVELY both Russia and China. Simply put i would not want to get caught dead holding that paper right now. That stuff is worthless...and the VERY intelligent Chinese (and Japanese) people who have been busy buying up dollar denominated assets by the bucket load are obviously very thankful that they have done so.

Hopefully they can get a visa to get over here too.
I mean it doesn't take a Harvard degree here to see what President Putin has done here is the most destabilizing act since...well, maybe ever.
Incredibly "not a word" that it is so.
Not a problem of course.

Most people simply cannot understand "such madness."
There was a time...not that long ago...when it was normative however.
And some have said "this has been normative in Russia for 1000 years."

chump666's picture

Wait till Putin plays Germany, with Merkel's 'you can leave 11,000 Russian military "non military" personal in Crimea, rest return back to Russia.' lol  And he increases the navy blockade and tries to turn off Ukraine's power.


chump666's picture

China first public bond default looming:

*Shanghai Chaori Solar may not meet interest payments on bonds due Fri
*Says can only pay CNY4 mln of CNY89 mln due to "uncontrollable factors"
*Would be 1st default in China's publicly traded corporate bond market


oak's picture

The purpose of the devaluation of cyn could stop the capital outflows, especially another 4-5% down.


Apostate2's picture

As for 'fluidity' mentioned below:

'Hong Kong Exchanges and Clearing will add yuan currency futures in an after-hours evening session from April 7 in its latest effort to promote yuan products.' (SCMP)

Also remember that Osborne's  recent visit was to promote London as a yuan trading centre.

elwind45's picture

Pinkslips out the front door boat slips out the backdoor? Elite leave their beloved China while poor workers head back to their beloved hillsides. Once stuffed with FOREX now cant float a non Imf /world bank loan. Trying to dump Barbie into American grandma's lap has run its course or paying a lot more for CHINESE junk isn't happening in any store anymore. This story is about a broken system and the banks who once loved it!