China: Why the RMB must fall by at least 10%

Tuesday, January 12, 2016 // Written by Enzio von Pfeil

The Central Bank is caught in a policy dilemma. It will opt for growth, hence a mushier RMB.


  1. Worse Economic Time®

    In our missive of 9th January we suggested that the Economic Clock® is ticking ever more negatively: China's excess demand for money and excess supply of goods is intensifying.
  2. What RMB support does

    Whenever the Peoples' Bank of China (PBoC)  supports its currency, it does so by decreasing its supply: it "gets RMB and gives dollars".  This reduces the supply of RMB outstanding; technically, this reduces "base money" courtesy of less forex reserves, i.e. less dollars.
  3. Policy quandary

    Beijing is stuck between a rock and a hard place. Either it fuels economic growth (in our jargon, propels the Economic Time® to an excess supply of money) by increasing the amount of RMB; alternately, it supports the currency by decreasing the amount of RMB outstanding.
  4.  Let the currency slide

    Our guess is that the policy makers will opt to let the RMB slide - by easing monetarily: by increasing the amount of RMB in the system. A softer RMB  has three benefits that can help to avert social unrest: a) money supply is increased, thereby helping to create an "excess supply of money", which in turn has to go in to asset markets, helping that 85% ownership of the stock market: retail investors; b) price-sensitive exports are goaded, and   c) inflation is imported (because one needs to spend more RMB on every dollar of imports).  Thus, our guess is that the RMB will fall by about 10%, the logic being that this measured drop will keep Congressional bitching & IMF frowning at bay...
  5. Investment implication

    Don't touch the Chinese/ Hong Kong  stock markets nor RMB for the time being. When your gut indicates, load up on price-sensitive exporters and on price-insensitive imports, i.e. on imports where RMB margins rise when they are sold into the domestic market. 


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