China's Currency Move a Success

by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors.

When the Chinese government changed its currency policy last month to allow appreciation of the renminbi (Rmb), skeptics like New York Times columnist Paul Krugman called the move a lame ploy to placate U.S. and European critics ahead of the G20 summit.

It appears this judgment may have been too quick and too harsh.

The renminbi gained 0.70 percent against the U.S. dollar in the first couple of weeks after it was unpegged from the dollar. That works out to an annualized rate of about 15 percent—a monumental move in the currency world.

In fact, CLSA’s Andy Rothman says that the policy change has been so effective that Beijing will actually have to curb renminbi appreciation to keep it at the annual target rate of 5-7 percent.

Rothman points out that the immediate appreciation is far higher than the average monthly rate seen in the 2005-2007 period (chart), when the renminbi’s exchange rate was last allowed to float.

The soft U.S. job market has been focusing blame on China for the decline of American industry, but Rothman reminds us that the U.S. manufacturing sector has been shriveling for more than half a century – from 23 percent of American workers in 1949 to 16 percent in 1989 (when Chinese imports were still “insignificant”) to 9 percent today.

The Chinese government has much higher aspirations than being the world’s factory of cheap goods. This year we’ve seen the government raise minimum wage requirements across the country and move to improve labor conditions.

This is all part of a longer-term plan to move up the manufacturing food chain and build a stronger base for domestic consumption. A stronger renminbi that enhances the purchasing power of both Chinese importers and the average citizen fits well into that vision.