One View: Don't Believe the Currency Hype — A Perspective Behind China's RMB Valuation (Part 1)

Yesterday, I decided to do a quick interview with my better half, Lisa Reisman, who also happens to be one of the foremost experts on sourcing metals from China. Lisa is co-editor of Spend Matters' sister site MetalMiner. Even though I'm biased in my opinion of her knowledge, I know she knows what she's talking about here, going back to the time she turned down an offer to run FreeMarkets' metals sourcing efforts in their early years. Over time, it's fair to say she has evolved her opinions on China sourcing and its appropriateness for different situations. But her views towards China's currency manipulation have largely stayed the same.

The context for our conversation was the news that China was willing to "tolerate a gradual appreciation of the RMB." In yesterday's Afternoon Coffee news summary, we featured a NYT wrap on the China RMB policy stance migration noting ... "Officials from Japan to Thailand to Germany on Monday hailed China's pledge Saturday to 'proceed further with reform' of the exchange rate and 'enhance' flexibility as a potential boon to their exports and national economies. Many economists believe the stronger renminbi will increase the purchasing power of ordinary Chinese citizens and companies, helping promote global trade in one of the world's largest markets."

But just what does it mean to "tolerate a gradual appreciation," really? In Lisa's view, this is more of a political charade than anything else. She believes that "It will result in a negligible movement in the exchange rate" and that it's really just "Beijing providing lip service prior to the G-20 summit to appease certain politicians and groups in the US." Indeed, Lisa suggests "the timing is more than curious here."

Given this context and opinion, where is the RMB headed a year from now? Lisa says she'd be "shocked if it appreciated by more than 8-9%, if it does even that -- and these numbers are on the high side." Based on her economic research, she suggests the RMB is still undervalued by 20-40%. In her view, "the currency should appreciate up to 40% but it won't because China still wants to protect its exports."

Stay tuned for further coverage on China's currency shift later in the week.

Jason Busch

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