Investors can either look at the devaluation of the Chinese currency, which sent the renminbi to its lowest rates versus the U.S. dollar, causing a furor in the markets and the global economy, as just that. Or, like Teresa Kong, portfolio manager at Matthews Asia in charge of the firm’s Asia Strategic Income fund, they can view it as part of the course in China’s trajectory toward the liberalization of its capital account.
The prevailing narrative, in Kong’s view, has vilified China, one month before Chinese President Xi Jinping’s visit to Washington, the currency depreciation has created added tensions between the U.S. and China, painting the devaluation of the renminbi to be a calculated, deliberate move by China.
To Kong, though, that argument holds little water, since China has been undertaking a series of moves that are not only aimed at shoring up its domestic economy but also at inviting in greater foreign investment into the country, all of which have been appreciated by the global investment community.
Overall, the changes, including the change in currency regime, as Kong views the recent events, can only benefit both China and the global economy in the longer-term, given how China’s importance as the main engine of global growth.
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“It’s important to reframe this as a change in currency regime and not as a devaluation,” she said. “China has had a peg to the U.S. dollar for years but last week, it decided that instead of aiming for the dollar, it would now aim for market equilibrium for its currency by monitoring a basket of currencies. This is a fundamentally different way of looking at things that I think is important to underscore and the devaluation is a consequence of the changes that are taking place in China.”
Here are the key points:
Resetting the Compass to Move Reform Agenda Forward
China has shifted course toward a “managed float,” Kong said. This is the next logical step in line with the country’s reform agenda, she said, which has been on a fast course the past nine months and includes such moves as the cross-boundary investment channel the Hong Kong-Shanghai Connect and policy moves by the government to shift bank lending away from state-owned enterprises to privately owned small- and medium-sized businesses. There has also been a further opening of the interbank market to foreign institutions.