Outside The Box: The Debate Over Renminbi Policy by John Mauldin

Longtime readers know how much I respect and rely on the Gavekal group for thought-provoking research. They have a truly unique organization, one in which even junior analysts can question conventional wisdom and ask uncomfortable questions. Moreover, they aren’t afraid to let the world (or at least their clients) see their disagreements.

Today I have a recent piece in which Louis Gave jumps into the team’s debate over renminbi policy. In true Gavekal style, he openly questions what others in the firm think about China’s currency. I won’t steal any of his thunder but just encourage you to read this piece carefully. It covers a great deal of very important ground.

Louis will have much more to say about China when he speaks at my Strategic Investment Conference in Dallas this coming May 24-27. We’ll also have Gavekal’s other two principals, Charles Gave and Anatole Kaletsky. They rarely all appear in the same place at the same time, so having the three of them together will be a special treat. I’m really looking forward to the good-natured arguments that will no doubt erupt among them. I always learn from their debates.

Speaking of SIC, our early registration period ends this Sunday, Jan. 31, and with it the chance to save $500 off the walkup rate. We’ll soon start promoting the conference more widely, so if you want to get in, you should act quickly. I wish I could tell you about some of the additional speakers we are very close to getting, but until the paperwork is finished you can’t talk about it. You are really going to want to be at this conference. It will be the event of the year. You can find more information and register at the SIC 2016 website.

I am still at the ETF.com conference in Hollywood, Florida (which is close to Fort Lauderdale). We are staying one more day to have dinner with friends and were thinking that a little beach-time reading would be good. But so much for sunny Florida – this morning saw tornadoes and rain and lots of wind. I could’ve gone back to Texas for that. In theory, I will get to have dinner with my good friend Suze Orman – if her plane doesn’t get stuck on the island where she is because of winds there. I really hope she can hop on over here, because she is just tons of fun to be with.

One of the good things about being at a very large conference like this is that many of the speakers and attendees are friends, so there is a lot of catching up, sharing of notes, and learning opportunities. I fully intend to be in bed by the time you get this issue of OTB, as an early night after the last three really does seem to be the better part of wisdom. You have a great week.

Your finally attacking his inbox analyst,

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The Debate Over Renminbi Policy

Louis Gave
January 21, 2016

One of the core tenets of Gavekal’s philosophy is that we embrace open debate. Rather than concealing the diversity of our analysis beneath a single suffocating “house view”, we strongly believe that conducting our —often animated—discussions about the big topics of the day out in the open adds value for our readers. And few of our recent debates have been as lively as the one over Beijing’s renminbi policy. Joyce’s view is that the Chinese currency is set to weaken this year as Beijing bumps up against the impossible trinity and accepts depreciation as a price worth paying  for interest rate cuts to support growth (see Going Down With The Renminbi). In contrast, Chen Long and Arthur argue that with key financial reforms now in place, the Chinese government is backing away from its policy of renminbi internationalization (see Retreating From An International Renminbi). In true Gavekal style, I would like to take issue with both views.

There are two separate topics here:

  1. Whether the renminbi is likely to rise or fall over the coming years. Right now, this is one of the questions which has got global markets in a panic.
  2. Whether the renminbi will make the grade as a truly international currency.

Of course, you could say that the two are related: for the renminbi to go up, it needs to become an international currency; and to a large extent, there is no doubt that increasing internationalization would lend the currency a nice tailwind, as more and more people, companies, central banks etc. start to save in renminbi. This argument is one of the reasons I have been bullish on the renminbi for the last decade. In my view, as we move from no one in the world saving in renminbi, to perhaps 2%, then 5%, then one day even 10% of the world’s savings (ex-China) being allocated to renminbi assets, the underlying demand for the currency would mean an increasing number of marginal buyers. And more buyers usually mean a higher price.

A Japanese precedent?

But that is not the only path to currency strength. As Arthur has pointed out, during the 1990s and 2000s, the yen was broadly strong, and Japanese government bonds were the best performing bonds in the world, in spite of a fall in global yen usage, weak domestic growth, short term interest rates that had been cut nearly to zero, and repeated bouts of quantitative easing from the Bank of Japan. This yen strength was the result of domestic deflation, large increases in domestic savings, deleveraging by the corporate sector, and of course a large current account surplus.

In other words, conditions that were not that different from those we see in China today. This brings us back to the first question above: Is the renminbi likely to rise, or fall, over the coming years?

Right now, I think it is fair to say that the consensus view is heavily tilted to the bearish side (when was the last time you met a renminbi bull?). To me this bearish bias underlines a simple reality: Everywhere around the world, we are in the middle of a massive US dollar buying panic. I see signs of this panic everywhere I look, from renewed speculation against the Hong Kong dollar peg (a dud trade if ever there was one), to the recent front page article in Canada’s National Post newspaper advising people to go out and do their grocery shopping now as prices are sure to soar because of the Loonie’s collapse, to the number of people falling over themselves to explain why China—the world’s largest exporter and the country now running the largest trade

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