Nova workboard

a blog from young economists at Nova SBE

Renminbi Depreciation

Chinese renminbi has started to depreciate against US dollar some months ago. Such depreciation has made oversea investors scared, and then they would sell their renmibi stock, which could lead to a shortage of the Chinese currency in offshore markets.

“Clearly people will be less inclined to purchase assets in renminbi because they are not expecting an appreciation,” , chairman of the City of London’s Policy & Resources Committee, Mark Boleat said. Unlike the majority of oversea investors, Mark Boleat’s opinion is that it is good to have more trade settlements financed with renminbi. He also said that if China’s trade out of the US could be paid in Renminbi, it would produce a fair amount of liquidity in the market, which means people should hold renminbi, because it would be an useful currency in the sooner or later future. Actually, importers already have a favorable condition when they purchase from China if they pay in renminbi. This favorable condition is that they can get 2 to 8 percent discount, which reduces importers’ costs a lot.

Renminbi depreciation scared oversea investors but it is essential for China to transform its economy. We know that when people expect the home currency to depreciate, they will buy foreign exchange asset and sell the domestic one, and vice versa. As renminbi was appreciated for some years, there was likely accumulation of foreign exchange assets in private sector. So, its depreciation could lead the market to return to equilibrium.

To conclude, as Mark Boleat said, “You cannot have a global currency where there is only one way of expectation.” So, I think people should not be afraid of Chinese currency’s depreciation, because it is a cyclical mechanism as it was appreciated before, now is the period of  its depreciation, and it is likely to be appreciated again in the future.

 

Yan Yang, nr.529

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Author: studentnovasbe

Master student in Nova Sbe

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