RIGHT TIME TO INVEST IN RMB?

About a month ago, my friend “T” (Malaysian) told me that he had been “stocking up” Renmimbi (RMB), or more popularly known as the Chinese Yuan, in phases. In fact, he started acquiring the Chinese currency over the past 12 months, and was still going to buy more. 

In the past two weeks, I also heard from a few other friends and relatives that they were doing the same time thing. The question that has flashed through my mind is: Could it be a mere coincidence that these individuals, who do not know each other, are doing the same; or could it be a new wave flowing among Malaysians to diversify their investments in the currency? 

Generally, the simple reasons in their layperson’s understanding are:

·        1. RMB is still currently undervalued, based on articles and reports they have read from various media sources. They have read that China is intentionally suppressing the actual value of the currency in order to make its exported goods to US and other parts of the world more competitive in terms of cost.

·        2. It is anticipated that China will relax its rigid control of RMB sometime in the not-so-far future. When that happens, the currency should appreciate.

·         3.The demand for RMB will be higher as China gains momentum in economic growth and trade with the rest of the world. They have read that it is heading towards the position as the world’s top economic power. And in their simple layperson’s understanding, this factor should pep up the value of the currency to higher levels too.

Being an inquisitive guy, it is thus natural for me to probe for more information regarding the current and likely scenario of RMB in the longer term. Are their simple layperson’s reasons for stocking it up now really plausible? Well, allow me to share inputs which I have gathered from various sources. I hope you will then perceive a more panoramic view of what may or may not take place in the near and longer terms with regard to RMB. 

First, I contacted “CS”, my friend who is a fund manager. Here are his views:

·        1. RMB is still pegged to US Dollar (USD). When USD appreciates, RMB should also appreciate. 

·        2, No amount of buying RMB by Malaysians using Malaysian Ringgit (MYR) will appreciate RMB against MYR if the Chinese currency is still pegged to USD.

·        3.If the intention of Malaysian individuals buying RMB is for short term investment, it might make more sense since there are some signs now of the US economy slightly picking up. But for longer term, the view could be on a different perspective.

Of late, MYR exchange rate against USD has been hovering around 3.1-plus to 3.2 (appreciating level for USD) compared to when it was less than 3.0. Would this explain why the recent buying rate for RMB with MYR has recently hovered around the 0.49-0.5 (appreciating level for RMB) compared to, say, Aug. 11 this year which saw the rate at around 0.459?  I leave to you to conclude whether the 1^st viewpoint postulated by “CS” holds water.

To proceed further on this subject, let me list out some pertinent questions and then to be followed by responses based on extracts taken from various websites.

1.       Question:  Isn’t China now practising a managed float arrangement whereby RMB is allowed to float within a narrow margin around a fixed rate determined by the authority in relation to a basket of world currencies?

Answer:  It was supposed to be so based on announcements by the government. But as it is now, RMB is still squarely pegged to USD. It is not floating freely, neither is it pegged to a basket of currencies. A blog specialising in foreign currency says all emerging markets economically competing with China know that RMB is pegged against USD.

2.       Question: Is RMB really undervalued?

Answer:  The subject has been much debated. Different parties and analysts have different opinions. 

3.       Question: Will RMB be an international reserve currency and likely when?

Answer: Neither for the moment nor the near future. The underlying factors that must first be undertaken by the government are not ready as yet. For example, China has to build up a strong open bond market. It may take a long time for RMB to become a reserve currency. 

4.       Question: Hasn’t China begun measures to “internationalise” its currency? 

Answer:  So-called internationalisation of RMB began in 2009 when the government launched the RMB Cross-Border Trade Settlement Pilot Scheme. The scheme permits cross-border RMB transactions for a variety of current and capital account arrangements. Meanwhile, initiatives to allow foreign companies to issue RMB bonds and initial public offerings have also begun. An international bank’s global market watch in July 2011 says: “The growth of the Chinese currency as a trading currency has been phenomenal.”  The size of RMB market in HK (offshore) accounts the daily turnover at an estimated average close to US$2 billion.

5.       Question: Do analysts anticipate the RMB to head for higher levels in value in the near future?

Answer: A blog specialising in foreign exchange mentions many economists concur that RMB will continue to appreciate, but it is more of a question of “when” and “to what extent”. According to an international bank’s resource centre, China seems to adopt a policy preference for the steady appreciation of RMB over time with the launch of the RMB Cross-Border Trade Settlement Pilot Scheme coupled with the commencement of foreign companies issuing RMB bonds and initial public offerings.

6.       Question:  Can a Malaysian open a RMB-denominated fixed deposit account with a bank in Malaysia?

Answer: According to a Malaysian Chinese-owned local bank’s website, RMB is in its list of foreign currency accounts. Please check it out yourself if you are interested.

I hope my sharing is useful to you…….in case you are thinking about whether to diversify into RMB.

Best Regards and Cheers!