The Battered Renminbi
When traders are looking at currencies to pair with the US dollar, the market normally turns to the Euro, Japanese Yen, Australian Dollar and other major currencies. Very rarely traders think to take a look at the Chinese Renminbi and charts such as the USDCNH. The Chinese Renminbi, or sometimes known as the Yuan, has been decreasing in value in the long term since February 2018 and also saw a large crash in 2014 decreasing in value continuously for 3 years.
Over the last 6 years, the asset has gone from 6.02186 Renminbi per 1 US Dollar to 7.01400 per US Dollar. For a trader trading 1 lot would be looking at a profit of over $14,000 based on this movement, not taking into account fees. In this article you will see exactly why the Renminbi is devaluing so heavily.
The Central Bank Devaluing the Currency
Very rarely you find a currency where the central bank is clearly trying to devalue the currency in order to support production and exports. China is a major exporting country therefore a lower valued currency is more beneficial in order for their products and services to be cheaper.
On August 11, 2015, the Bank of China surprised markets with three consecutive devaluations of the Renminbi, knocking over 3% off its value. Since 2005, China’s currency had appreciated 33% against the U.S. dollar.
While the move was unexpected and believed by many to be a desperate attempt by China to boost exports to support the economy that was shrinking at its slowest rate in a quarter century, China claimed that the devaluation was part of its efforts to move towards a more market-oriented economy, which consequently had substantial repercussions worldwide.
On August 5, 2019, China set the Yuan’s daily reference rate below 7 per US Dollar for the first time in over a decade. This, in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Donald Trump administration, set to go into effect September 1st, 2019. Global markets sold off on the move, including in the U.S. where the Dow Jones lost 2.9% on its worst day of 2019.
Despite the disapproval from most regional and western countries the price movement continues to be tradable. This was not the only time that China has attempted to devalue their currency to benefit the local economy.
COVID-19 and Current Economic Conditions
China’s success over the last 30 years has been massively linked to exports and the world buying their cheap produce. However, being attached to the global economy has also acted as a double edged sword in recent times due to the virus pandemic. The global recession and lockdown have meant, and mean, a drop in demand for China’s exports. This includes a drop in demand for phone system devices, computers, optical readers and petroleum oils which are all China’s most valuable export products.
The official unemployment rate in China’s cities has already hit the government’s target. There are independent forecasts that say it could go much higher. China’s politician, Premier Li Keqiang, acknowledged the scale of the problem last month when he said: “The truth is that in April that figure already hit 6%. Employment is the biggest concern in people’s lives. It is something of paramount importance for all families.”.
Addressing workers at firms like Lotus, Mr Li said: “Many export companies have no orders now, which has greatly affected their employees. We must provide support to all these people and businesses in difficulties, but most importantly, we must help them land jobs.”.
This article has hopefully shown traders a new possible asset which they can take into account as part of their trading. A lot of traders are looking to short currencies and this is an example of a shorting currency which its government and central bodies also wish it devalues. Traders can also research further risks related to the currency, such as rising unemployment, trade wars with the US and even sanctions from the west due to China’s political conflict with Hong Kong.