Tuesday, September 20, 2011

First Renminbi RMB Foreign Exchange Rate target

(RMB, also called CNY, or simply Yuan) gained +3.5% YoY to 6.59 against USD at the year close in 2010.It has also been a year-end record high since the Chinese exchange rate reform in mid-2005.

USD/RMB Forex Rate chart

Current USD/RMB Forex (Foreign Exchange) Rate Chart

Now we, Mr China, release our first USD/RMB foreign exchange (forex) rate target as 6.3628 in the year 2011. According to our rating system, the current USD/RMB level of 6.3880 (as of 16 September 2011) should be rated as "reasonable".

Our calculations are based on a number of important factors, including but not limited to: Euro, USD index, China trade balance, China productivity/GDP, China CPI, etc. Here are our basic assumptions:

(1) Euro will remain weak in 2011 as the market still fears the contagion effect of European debt crisis spilling to other Euro-zone countries. Until now, only Greece, Ireland and Portugal have accepted bailout to get capitals from European Union (EU) and International Monetary Fund (IMF) to weather their debt crisis, and therefore we expect the remaining two out of the five PIIGS countries in Europe will still be under pressure until they all accept bailout and commit to fiscal consolidation. In the long term, an effective mechanism to avoid over-spending (ie.: spend more than they can afford) is necessary for all Euro-zone countries. After all, Europe is the biggest export market of PRC, making up around 20% of China overseas shipments, and a relatively weak Euro should be harmful for Chinese exporters.

(2) Despite of the weak Euro, the USD index will not rally much beyond its 200-day moving average (75.8 as of 16 September 2011) as long as the U.S. continues to rely on the method of monetary quantitative easing to support its economic recovery.

(3) Our targets for the rest domestic factors are already stated in our previous articles 2011 China Trade Balance target, 2011 China GDP target and 2011 China CPI target respectively.
The 6.3628 is our initial release value of USD/RMB forex rate target in 2011, it can be upgraded/downgraded later if those important factors may change.

By the way, this first release is just for introductory purpose and should be for reference as we will release our 2012 USD/RMB forex rate target soon. Our formula of this target has already been developed since June 2010 by Mr China's independent currency expert team, and yet we have no plan to disclose this formula to the public, at least up to this moment.

Since we put our estimated fair values of these important factors into our formula, our term 'target' is surely NOT the maximum possible value of USD/RMB forex rate will reach in the year 2011. It actually represents a fair value (reasonable price) we believe USD/RMB will be. We believe our target (fair value) shall be a better indicator for most forex investors, as they can easily understand if the RMB market value exceeds our target then it will not be a good forex rate and reasonable price for them to take risk to buy. Mr China, however, never encourages any risky foreign exchange trading (especially forex margin trading), and so please refer to our risk disclosure and disclaimer statement for more details.

Last but not least, we also hope our target can clarify the doubt of a number of western politicians who say the renminbi is significantly undervalued. We are politically neutral and truly just want to remind all our readers that the RMB appreciation is no longer a guarantee, especially after June 2010, PRC government decided to re-peg RMB to a basket of currencies including Euro. Investing in renminbi is not risk-free as it is not impossible that Euro can collapse in one day.

Although it is now a bit more easier than before for personal customers to 'buy and hold' RMB worldwide (see our article: Chinese Bank declares RMB Business War across the World) through the Bank of China (BOC stock codes: 601988.SS for A-shares, 3988.HK for H-shares), please always be reminded that renminbi is still not a freely convertible currency. Unlike the other major currencies, renminbi liquidity outside the PRC is still very limited. There are also very few RMB-denominated investment products currently available in offshore markets. As there is no guarantee that renminbi will rise by much any time soon, investors can be just sitting on dead money for a long time. With maximum limits on RMB daily and annual trading amount imposed for each renminbi account, the risk to hold RMB overseas can be significant especially during extreme market conditions.

We do expect, despite the above-mentioned fundamental risk factors, a gradual renminbi appreciation over time as the latest New Milestone For RMB Global Circulation already re-confirmed the direction of RMB internationalization.


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