CNY convertibility – long run impacts on Australian Dollar

November 3, 2011

FOREX, Global Macro

Yesterday I heard that Russia had finally been granted admission to the WTO. apparently the mandarins in Tbilisi had decided that their Georgian blocking of the Russian ascension to the WTO was hurting them more than the Russians who were blockading their wine and other exports. So they put their pride aside and even though they fought, and lost, a war just a few years ago the former Soviet satellite is moving on.

So it is more broadly around the world because, believe it or not, even while the Greek situation seems to go from drama to farce the rest of the world is still just trying to get on with things. People are still trying to make ends meet, governments are still trying to provide the services for infrastructure and their economy and markets are just trying to make a buck. Life goes on as they say.

So today I would like to take a break from all the doom, gloom and boom (yes literally as in explosion) of what will or might happen in Greece and Europe and what that might do to markets and focus on the progress of the Chinese toward convertibility of the Chinese Yuan (CNY). Whereas the market sets the rate for currencies like the Australian Dollar the Chinese have a firmer control on their currency allowing it to slowly appreciate through time but only at a pace and with a direction they are comfortable with.

As the chart below shows the CNY has been steadily appreciating since the middle part of 2010. Slowly but surely and regardless of what the American legislature might say the Chinese should be congratulated for the speed and persistence with which they have allowed the CNY to appreciate against the USD in that time. It is up 7% since then but more importantly 23% since 2005. So the Chinese aren’t exactly being recalcitrant just not moving to the speed or whim of the west which dearly wants the CNY to be well, dearer and thus less competitive.

So the news, in the FT yesterday our time, that the Chinese where moving toward convertibility of the CNY and perhaps at a faster pace than many had expected was to me good news for the global economy and for Australia. First what is convertibility? Essentially it implies that the CNY is freely convertible to other currencies without government intervention – in Australian term, it floats. So the market will set the rate.

The FT was quoting Xia Bin “an advisor to China’s central bank” who said that,

…if the Chinese government is to turn Shanghai into an international financial centre  – a hub to rival Hong Kong or New York by 2020 – it won’t be able to do so without a fully convertible RMB.

“We are very close to the requirement for full convertibility. Personally, I think we are just one step away now. It will be a political decision and we are not as far away as some people think. It is not as big of a step as some people tout it,” Xia said.

“We have 10 years and we should be able to do it [make the renminbi fully convertible],” he added.

So it’s not going to happen in a hurry and I doubt that it will happen until this crisis is resolved because as the FT noted,

one reason Beijing has not yet make the RMB fully convertible is because of fears that this will attract a deluge of speculative hot money from investors who believe the renminbi can only get stronger against the dollar.
And there in lies the impact on Australia and the Australian Dollar. I strongly believe that a large part of the demand for the Australian dollar and the reason it seems to have been able to levitate above what you might think were more normal levels in this crisis is that it is now clearly both a leveraged China play but also a convertible China play.
You can move in and out of the Aussie in a way that is much easier than the CNY and you still get the leveraged bet via the Australian terms of trade. As we suggested yesterday however with the piece on the potential weakness coming down the pipe in China and the flip side of this is that if China does slow and if Australia’s terms does slip as the RBA suggested at this weeks monetary easing then the Australian Dollar is entering more dangerous waters than many think.
This, along with the technicals is the source of my near term bearish bias.
Longer term though a freely convertible CNY would take a way the buyers of Aussie who use it as a proxy for China as they could go direct themselves. But a freely convertible CNY would likely put upward pressure on the CNY meaning they can afford to pay more in USD terms for resources so it just might balance out.
With the mess in Europe going on and with all the other headwinds out there the move to convertibility is a long way away. And with the G20 meeting likely to have an other pop at China and its currency regime this is a conveniently placed story and bunch of comments.
but in the long run as China develops and its markets free up I reckon that it can only be good for Australia and the Australian Dollar, even if we lose our status as the convertible Chinese currency.
If you would like to read more about my thoughts on China and the Australian dollar here is a piece I wrote at MacroBusiness earlier this year.

 Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at or Greg directly on

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