Monday, November 16, 2009

Renminbi - Forecast for the future.

A lot is made of the fact that the renminbi (RMB), or the yuan is kept artificially low by the Chinese authorities and the truth is that this currant level of 6.83 to the US Dollar is unsustainable in the long term.

The first big test will be the next oil price rise which could come as soon as this winter if it is particularly cold in the northern hemisphere.

As everybody knows the US got away with consuming 45% of the worlds output not by outworking,outproducing or outperforming the rest of the world but by convincing them to buy US dollars at an incredibly expensive rate. Suddenly China owns most of these bits of paper and has a vested interest in preserving the value of them or so it seems. The situation would be fine if the euro did not exist and its effect of replacing the dollar as a reserve currency.
China cannot really expect its export markets to continue to grow at the expense of its own citizens welfare and wealth. The path the Chinese will take is a substitution of export growth with growth in internal consumption and the subsequent growth in services. They can probably maintain 10% annual growth rate with a 10% annual reduction in the rate of the yuan to the dollar.

  • 2009 6.83
  • 2010 6.15
  • 2011 5.54
A full floating exchange rate could be undertaken if there is more transparency and less government cross subsidies of energy costs.

The Chinese don't have to worry about selling less toasters in the West as most of the western consumer goods factories are gone and it would take at least three years to get them going again.

More cars were sold in China last year then in the US and they will have an appetite for petroleum products to put in them and on them.

Remember China bought 30 billion dollars worth of oil from Iran in 2008. And wouldn't it be better for the Chinese if they could pay for it using some yuan they printed themselves instead of using those hard earned US dollars.
It would probably suit the Iranians too as they buy their toasters from China.

My prediction for the future rate is as my table

Update from original post of Nov 2009

My revised prediction for Nov 2012 is 5.85.

The rate did not fall as fast as I expected but this year there will be an increase in the rate, especially as Iran will move from selling its oil in dollars to China.