A year ago, many hedge funds were congratulating themselves on one of their better ideas: borrowing cheap yen and investing in long positions on the Chinese renminbi.
The trade was both safe and lucrative. The two currencies are among the most controlled in the world. The Japanese government, with the strong support of the Bank of Japan, was doing everything it could to drive down the value of its currency. Meanwhile, the Chinese government had allowed its currency to steadily appreciate — about 35 per cent in trade weighted terms since 2005.
A slowly rising renminbi was part of Beijing’s policy to force manufacturers to move up the value-added chain. It was also part of a policy to internationalise use of the renminbi, especially between Chinese exporters and overseas customers. And while capital controls remain, the goal of that internationalisation is for the renminbi to eventually become a reserve currency alongside the US dollar.