RMB v. World: The Repercussions of China’s Devaluation of the RMB

by Robert Kramer

Several excellent presentations were given to members of FEI’s Committee on Corporate Treasury during its December 1, 2015 meeting at Deloitte’s “30 Rock” New York offices.

Among the most interesting and controversial of these was David Woo’s “China’s Currency Prospects and the Impact on the Global Economy”. Dr. Woo, Managing Director and Head of Global Rates and Currencies Research, Bank America Merrill Lynch (BAML), made the compelling argument that China would likely devalue the RMB following Fed tightening. This could, in turn, have long-term global ramifications greater than the expected increase in U.S. interest rates.

Dr. Woo contends that the RMB will depreciate against the dollar by 10 percent over the next 12 months, citing eight reasons for this prediction. For example, he asserts Beijing’s recent support for the RMB was designed to have it included in the basket of currencies that comprise the IMF’s Special Drawing Rights (SDR). With a favorable IMF vote behind it, the incentives for continuing that level of support have diminished significantly.

The recent decision to lift restrictions on Chinese citizens’ ability to purchase foreign assets suggests Beijing will tolerate further capital outflows that would accompany an RMB depreciation. In addition, the fact that Chinese corporations have paid down foreign currency debt since the beginning of the year to the tune of $200 billion greatly lessens official concern that a depreciated RMB will hurt companies with unhedged foreign currency denominated liabilities.

In fact, China’s deteriorating profit picture and high overall corporate debt strongly support a reduction in domestic interest rates. However, Woo points out China cannot have an independent monetary policy, a relatively open capital account and a fixed exchange rate at the same time. Something has to give and Woo suggests the government will allow the RMB to float downwards.

Woo’s most startling contention was that the depreciated RMB may have a greater long-term impact on the global economy than Fed tightening. He suggests the RMB depreciation will push the Fed to slow the rate of interest rate rises after the initial rate increase (the Fed itself has cautioned that the speed and size of further rate increases will depend on economic feedback).

This would slow the U.S. dollar’s rise against the Yen and Euro, pushing the European Central Bank and Bank of Japan to continue monetary easing. Currencies of countries with strong commodities relationships with China, including Australia, Brazil and Canada, will likely trend lower, as will currencies of export competitors such as Mexico, South Korea and Taiwan. Woo discussed the implications of these various scenarios for U.S. investors. Needless to say his presentation sparked a lively discussion, and not a little pushback from the corporate treasurers assembled around the table.

Other interesting sessions included: “The Shareholder Activism Environment” (BAML), “Attracting and Retaining Talented Treasury Professionals” (Korn/Ferry International), “Hedge Accounting – Anticipated Changes and Compliance under US GAAP” (Deloitte), and “OECD Base Erosion Profit Shifting (BEPS) – What Treasurers Need to Know” (Deloitte).