China, copper and contagion

The Chinese stock market has been remarkable over the past year. It took off like a rocket, crashed back down, yet is still up 30% over the past 12 months. In China, we get a boom, bubble, crash and bust all within a year

China has been the world’s growth engine so there are legitimate concerns that a slowdown is everyone’s problem. The recent panic in global markets was allegedly triggered by a 3% fall in the Renminbi, but there’s always more to it. This really isn’t very much given the 36% rise between 2005 and 2013. In fact, the Renminbi has been the world’s second strongest currency since 2008, only being piped by the Swiss Franc.

Dollar performance versus currencies since January 2008

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Table note: The Renminbi is one of the very few that has appreciated against the dollar since early 2008. The Real, the Rupee, the Lira. Such high hopes yet all have been value destroyers.

Perhaps, the real fear is the Renmnibi has become just another Asian currency that will no longer be immune from regional pressures.

Chinese Renimbi and Asian Currencies (ADXY) – since 2005

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Chart note: The Renminbi (red) has spent much of the past ten years appreciating against the dollar. During the credit crisis, the rate was held firm whilst Asian currencies (black) collapsed.

The market fears further devaluation, and it should. The purchasing power statistics suggest the Renminbi was 20% overvalued to start with and so there’s still 17% to go before we reach ‘fair value’. The Chinese government don’t like having their hand forced, so they’ll devalue as and when they want to. The greatest overvaluation of has not been felt against the dollar, but against the yen.

Chinese Renminbi versus the Yen – past 20 years

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Chart note: The Renminbi (red) began rising against the dollar in 2005, but didn’t appreciate versus the Yen until 2012. Since then, the move has been significant. The yen has fallen by 40% against the Renminbi. As I have highlighted before, notice the significance of this relationship from a global macro perspective. The downturns in CNYJPY preceded the Asian crisis, the 2002 recession and the credit crisis. We should take note.

The harsh reality is that a Big Mac in China is now more expensive than in Indonesia, Malaysia and Hong Kong. It may further surprise you to hear that a Beijing Big Mac is only 11% cheaper than in Tokyo, despite its neighbour being one of the most advanced countries in the world. A softer Renminbi will export further painful deflationary forces around the world.