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Debate over future of RMB exchange rate

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China’s People’s Daily newspaper, often regarded as the official newspaper of the Chinese Communist Party, has published an op-ed warning billionaire investor and former hedge fund manager George Soros not to bet against the Chinese renminbi (RMB).

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Soros’ challenge to the RMB and Hong Kong dollar are doomed to fail, without any doubt.Mei Xinyu (People's Daily Online)

Soros did not explicitly say that he was betting against the RMB or Hong Kong dollar (HKD), but did state that he was betting against Asian currencies in general and that he predicted more trouble for the Chinese economy, while speaking at the recent World Economic Forum in Davos. These statements made headlines, in no small part due to Soros’ famed bet against the pound sterling in 1992, which broke the Bank of England and earned him USD $1 billion.

China’s response to Soros’ relatively vague comments has been interpreted by many as an overreaction, but the country’s defensive posture is understandable given the heavy devaluation of the RMB against the US dollar (USD) over the past year, and corresponding capital outflows estimated to have exceeded $1 trillion.

That said, the People’s Daily is not alone in predicting that the value of the RMB will remain stable. As reported by The Street:

Don’t expect the Chinese government to sharply devalue its currency anytime soon, even if it would help stimulate its slowing economy, says Greg Woodard, senior analyst at Manning & Napier.

“The Chinese government knows that a sharp devaluation of the renminbi would not be well-accepted by foreign governments, and would also be seen as a sign of potential instability,” said Woodard. “This would conflict with their efforts over several decades to cultivate the image of being a stable, responsible global economic power and would make it much more expensive to service their dollar-denominated debt.”

As a result, Woodard predicts that a sharp and uncontrollable currency devaluation would not serve Beijing’s political or financial interests, even though it would spur China’s economy, given its position as the world’s largest exporter.
Gregg Greenberg (The Street)

 

Devaluation of the RMB would certainly bolster international trade, by lowering the cost of Chinese exports, but for now China’s central bank has promised to keep the currency stable (e.g., through central bank purchases).




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