Death by a thousand cuts originated in China. For investors in renminbi assets, it is staging something of a comeback. Since mid-August last year, when China allowed its currency to weaken by 2 per cent in one day, the renminbi has slipped 6 per cent. On Monday, China’s finance ministry confirmed that it would sell Rmb3tn ($458m) of renminbi bonds in London in the largest offshore listing since 2011. The outlook for the currency will be a significant factor for potential buyers.
The good news for bond buyers is that an outright devaluation of the renminbi is unlikely. The past few years of currency strength have helped China rebalance towards consumer spending. Deliberate devaluation would undermine this and damage the government’s credibility. As global demand stagnates, any boost to exports would probably prove insufficient to offset these detrimental impacts.
Involuntary devaluation may seem more likely. Yet China has fought hard to protect its currency from those trying to force it down. And, despite capital flight diminishing its firepower, Fitch Ratings notes that China’s current account surplus still goes a long way to help plug the leaks and shore up foreign exchange reserves.