No need to fear renminbi strength

By Antje Praefcke

Published: March 11 2010 16:08 | Last updated: March 11 2010 16:08

Markets are overestimating the potential impact of an appreciation of the Chinese renminbi against the US dollar on other currencies, says Antje Praefcke, currency strategist at Commerzbank.

“The only option for Chinese exporters earning dollars is to hand these into the central bank – if the currency is allowed to appreciate they will receive fewer renminbi, but the dollars the People’s Bank of China receives will stay unchanged,” she says.

Fears of a reduction in China’s trade surplus with the US, due to falling exports, are not borne out by history, Ms Praefcke says. “In particular in the years 2005 to 2009, when the trade-weighted renminbi appreciated notably, China’s trade surplus rose massively.”

She argues that the main effect of renminbi strength would be psychological. “Markets would expect falling exports to hit China’s economy and hence global growth. But if China exports less due to a stronger renminbi, those countries importing less from China would record stronger growth – resulting in a zero sum game.”

And while renminbi strength could rekindle再振作 fears of Chinese reserve diversification, Ms Praefcke says this issue still involves many unknown factors.

“The direct effects of a renminbi appreciation will not be discernible. Only secondary effects, which will be mainly of a market psychological nature, will have some limited effects on the G10 currencies.”