Rogge Global Partners is a $36 billion global fixed-income specialist based in London. Malie Conway, co-CIO and head of global credit, and Ranjiv Mann, head of economic research, explain why renminbi weakness needs to be carefully managed.
Q: It appears the renminbi is going to decline in value some more. How do you play that?
Conway: We have very little risk on. You can’t properly trade China; the authorities there can manipulate the level of the yuan. We think the Taiwanese dollar is a good proxy, though. It reflects the region’s fundamentals.
Q: So you’re short the Taiwan dollar?
Conway: Yes, versus the US dollar. We are also long the Mexican peso versus the dollar – we have taken views through both bonds and the currency. But we size it cautiously (i.e., keep exposures small) because the peso is also a proxy for investors taking views on Latin America in general.
Q: Do you agree with the statement that the renminbi is set to depreciate further?
Conway: My take is [that] it’s the most expensive currency by any measure. The authorities want it to depreciate. If it happens in stages – say by 3% to 4% at a time before being stabilised for a while, and then it declines again – it gives people the impression that the People’s Bank of China is in control. If the PBoC allowed the renminbi to simply drop by 20% or 30% in one go, the market would probably see this as the result of a policy mistake. The renminbi is going to end up in the same place but the gradual approach gives a credibility boost to the PBoC.
Q: How quickly will this take place?
Conway: I think they’ll make sure to finish the depreciation cycle before the renminbi formally joins the IMF’s Special Drawing Rights basket, which is scheduled for October 2016.
Mann: China faces problems of a large private-sector debt burden, demographic headwinds, disinflationary forces due to overcapacity, and a currency that is fundamentally overvalued. How could anyone manage all of that without producing market volatility? China is undergoing an economic transformation to a market-based model, and any transition is going to be painful. Moreover, China is not as competitive as it was 10 years ago, so it has no choice but to devalue the renminbi.
Q: How do you play this transition in the portfolio?
Conway: I wouldn’t do it via the offshore yuan, because China can control that; they can change the rules, pass any law they like overnight. The August 2015 equity intervention was a mistake. Foreign investors aren’t used to being told they can’t sell securities that they own.
FA: Let’s conclude on a more upbeat note. What are the bright spots today?
Conway: We like countries with growth, improving economic fundamentals, and modest inflation. So the bright spots today are in Europe. Europe’s economy in aggregate is still growing by 1% to 1.5% per annum, which is decent for them. On a relative-value basis these markets are attractive, and we might see the euro stage a recovery in the second half of the year.
Mann: The European Central Bank’s policy support – from its Long Term Refinancing Operations (a form of sovereign QE) to cutting interest rates on deposits – have all helped to drive down borrowing costs. It’s been especially helpful for small companies in the peripheral countries like Spain and Italy. The decline in the euro has been a positive for the region. Also, European governments’ fiscal policies have been less contractionary than in 2012 or 2013. The refugee crisis brings problems to society but it is also prompting additional fiscal spending, especially in Germany. The decline in oil prices has also supported real incomes. So while I wouldn’t say we’re bullish on Europe, its economy can grow at trend, which is a good outcome.
Keep an eye on financeasia.com and the next edition of FinanceAsia for more insights from Rogge Global Partners
