Diary of a Financier

Side show: Chinese Renminbi v. Shanghai

In Economics on Thu 13 Jun 2013 at 17:10

I mentioned this earlier today, but it’s worth another look: How on earth has the Yuan’s appreciation gone unnoticed? A few years ago—in fact, as recently as Mitt Romney’s presidential campaign—Washington DC’s loudest complaints were about labeling China a “currency manipulator.” Well, $USDCNY has steadily fallen 10.25% since 2010’s peg was removed and more than 4% in the last 12 months. As the revaluation has done little to move the needle in US, American politicians have quietly inserted their feet into their mouths. While RMB’s appreciation may look small, those are actually big moves for an emerging market so reliant on its export economy, and the impact has been manifest in China’s stock market.

To wit, take a look at the following chart of USDCNY vs the Shanghai Index ($SHGIDX), including their rolling correlation. The positive correlation reversed once PBOC accelerated revaluation of RMB in 2007, and now Yuan appreciation is in lockstep with Chinese stocks’ decline. I ask again: Why doesn’t anyone mention this unabated revaluation or its correlation to the Chinese equity market?! SHGIDX is in a massive bear market, and nobody can say that CNY had nothing to do with it–whether cause or effect:

USDCNY v SHGIDX

USDCNY v SHGIDX- correlation (purple)

I’ve talked a lot about the pendulum swing occurring in China, and I’ve successfully traded it too, via $CREE, $FXI, $WYNN, $YUM, and even $CLF.¹ I have to reassert that this is a healthy long term development for their economy—a necessary maturation process that will aid their transition from export-intensive/fixed investment to consumption. The question that remains is how leveraged the system grew after years of easy money was sanctioned [and hidden] by the central government. Now that the tide is going out, we’ll see who’s swimming naked.

–Romeo

¹CLF has worked 2 of 3 times I’ve owned it, but most recently, it was a value trap: I bought it at a perceived discount to fair value—fully acknowledging the vacancy left by waning future Chinese demand; I’m still stuck in it, but I’m convinced it’s deep value now.

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  1. Video: Chinese Yuan, Redback Rising | The Economist
    MSM picks up on the story. Here The Economist develops a proprietary “Yuan Index,” which better reflects relative changes in unit labor costs and shows an even greater appreciation has taken place.

    http://www.ritholtz.com/blog/2013/06/yuan-redback-rising/

  2. […] demand from Europe, hastened by a Eurocrisis recovery and strong $EURUSD. I think you can add China to that mix too. That’s the upside of our from our maturing technology renaissance: a global, […]

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