Renminbi's rise not over yet

During China’s National People’s Congress last week, Premier Wen Jiabao said that the renminbi has probably reached fair value against the US dollar. We asked our readers the same question, but got a different answer.

Here’s what Wen had to say: “In the Hong Kong market, the non-deliverable forwards have started to fluctuate in both directions. And this tells us that the exchange rate of the renminbi has possibly reached equilibrium."

Our readers, on the other hand, were less convinced — slightly more than half of them said that the renminbi was still not fairly valued.

However, depositors in Hong Kong seem to be taking their cues from the Chinese government. Offshore renminbi deposits grew by almost 10 times between the start of 2010 and November 2011 as investors bet on a continued rise, but growth has fallen back since then, in part due to expectations that the Chinese government will limit further appreciation.

Trade data added some weight to this theory, when the February numbers showed that China had suffered its biggest monthly trade deficit since 1989, in reaction to economic weakness in the developed world and the rising cost of energy and commodities. With weaker exports and more expensive imports, China’s trade surplus has shrunk and caused some analysts to predict an end to the renminbi’s rise. At least for now.

But not everyone agrees with that outlook. “Those focusing on February’s trade deficit are missing the big picture,” according to Anthony Chan of AllianceBernstein. “The February data was distorted by the timing of China’s week-long Lunar New Year holiday, which tends to cause a seasonal drag on China’s trade balance early in the year. If history is a guide, the trade account should improve noticeably in the second quarter.”

And the renminbi still has plenty of catching up to do, according to Chan, in a note to clients. Since China loosened its grip on the currency in 2005, the renminbi has risen by about 20% against the currencies of its main trade partners, while its foreign reserves have risen more than fourfold.

That strategy of accumulating reserves has kept appreciation in check, as the Chinese government knows only too well. But the country is also keen to move away from its dependence on exports and to limit the effects of inflation — both of which will be helped by a stronger currency.

“The bottom line? Despite any talk to the contrary, we think the renminbi is set to continue appreciating at a moderate pace in 2012 — and beyond,” according to Chan.