What’s happening to the RMB?
Posted on March 19, 2014
Despite the news being dominated by missing jets and Russia’s continued excursion into surrealist drama in the Crimea, the real interesting news for China based expatriates is elsewhere. The real interest is the people’s currency, the Renminbi and its sudden change in direction.
The one-way bet stops
Since 2005 the Renminbi has been the steadily rising against the USD. In fact it has been one of the most consistent trends in finance during that period, rising from 8.2 to 6.04 just two weeks ago. That trend has changed quickly, at least for the RMB since it has now weakened quickly to 6.17 as of last night and looks like continuing. It now looks like a ski jump heading up to the sky.
We saw the day the RMB would stop rising coming. That’s not an idle “I told you so” based on misremembered bar musings. We even wrote a research article on our website on this precise topic in July 2012, predicting the RMB would not get past 6 to a USD. Read the article here. Much of our reasoning remains the same today as it did then.
In the end the RMB got mighty close. We also sadly didn’t make any large scale bets or investments in our view. The government has said that it didn’t want the RMB to be a one-way bet which was encouraging speculation. There could be truth in this, although the government might have been more relaxed about fluctuations if the RMB was at or above the level it deems fair for the RMB. Given how overseas investment into China for export industries has stalled completely in recent years, this seems accurate.
Inflation in China
To further support our case, the latest edition of the Economist discusses inflation in China and how, in recent years at least, inflation has been underestimated. For anyone living in China over the last 7 years, this is not news. The only thing about visiting London or New York these days from Shanghai is how reasonable the prices are overseas. A falling currency is a better reflection of that lack of (and falling level of) competitiveness.
What does this mean to me?
The days of an easy 6% per year simply holding RMB are over. In fact, we wouldn’t be surprised to see the RMB bounce around a bit, but ultimately decline at 5-10% per year for a couple of years. Inflation in China remains higher than the US or Europe. The RMB will become a normal currency. There is minimal government reform outside of finance and banking. Government barriers to effective competition continue to rebuild themselves following the reforms of the 1990’s under Zhu Rongji and WTO pressures.
Bottom-line
If you want to make good easy and safe returns, you are now going to have to look at overseas options in foreign currency options. The good news is there is a world of options out there. If only you knew an adviser who specialized in foreign options.
About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area. This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China. Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business. Owen's interests are tennis, running and his wife and two children. He speaks fluent Chinese, first arriving in China in 1997.
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Categorised in: Emerging Markets, Investing in China, Investments, Market Flash, Offshore