The consensus is that China's June announcement on renminbi reform changed very little and was more of a symbolic move to relieve international pressure. But any move by China -- particularly one with such major global implications -- can hardly fail to affect the markets, particularly on a long-term view.
On June 19, China announced a shift in its exchange-rate regime, moving from a fixed peg at 6.83 renminbi to the dollar back to the crawling peg that had been in place from July 2005 to September 2008.
"The recent announcement has been widely anticipated and the immediate impact on markets has been minimal," says Western Asset Management in a recent client note. "The market has priced in roughly 3% appreciation against the greenback over the next 12 months. The more bullish forecasts call for closer to a 5% appreciation."
But, looking ahead, the move looks set to have a substantial effect on everything from other Asian currencies to China's import/export balance to commodities, among many other things. A widely adopted view is that China will benefit less than many other countries -- particularly those in the West -- and that this is also a positive for risk assets.
Swiss firm Sarasin, for example, has increased holdings of short-dated emerging-market (EM) bonds and currencies, according to the Sarasin House Report Quarter 3 2010 Market View by Guy Monson, chairman of Sarasin Group's investment policy committee. The bank argues that a stronger RMB will be reflationary for the global economy and deflationary for China, benefiting both, while reducing trade friction and rebalancing global demand.
"This global story supports a renewed rally in risk assets, increases the risk of bonds at today's ultra-low yields, and highlights the potential of blue-chip companies that operate globally and have a strong EM presence," adds Sarasin. "On the back of these trends, the giant exporters based in France and Germany, whose combined exports exceed either those of China or the US by almost 25%, will especially benefit given China's soaring wage costs."
Monson suggests that Asian investors should invest in Asia from beyond the region, "as companies selling into the emerging growth miracle are likely to deliver better results than local players". "The valuations and currency advantages of Western-based companies are compelling," he adds.
Western Asset also backs risk assets. "The immediate implication [of the RMB announcement] is that the risk of the US Congress passing protectionist measures has declined," says the firm. "This is positive for risk assets. Over the longer-term, the redirection of purchasing power from safe assets to goods and services should also benefit corporations and so should be positive for risk assets."
The US manager also agrees with the consensus view that other Asian currencies will be encouraged to appreciate. "The Korean won, Malaysian ringgit, Indonesian rupiah and Singapore dollar are all possible vehicles," says the firm.
Meanwhile, Schroder Investment Management, in a note published in late June, supports Sarasin's and Western's comments, while adding that commodities will be a beneficiary.
In the longer term, a more valuable RMB should lead to China importing more goods and rebalancing its economy away from capital goods and exports towards consumption, says the UK asset manager. A weaker dollar versus the renminbi and other Asian currencies should help global reflation, reduce global imbalances and be positive for commodities and most emerging markets, adds the note.
Schroders also agrees with Sarasin that China may not be one of the winners from RMB reform. "In conclusion, this is a positive for emerging markets, but the actual extent of the move may mean it is only a small positive," says Schroders. "At a portfolio level, we remain neutral China. While valuations are reasonable in China, earnings growth remains relatively poor."