Blackwood Engineering's Commercial Intern Finlay McLoskey is a final year finance student at Cardiff University specialising in currency.
He recently penned his thoughts on the RMB currency, what has gone on and the effect it has had on the business.
Blackwood Engineering works alongside leading equipment manufacturers across the globe providing parts to locations including North America, South America, Europe and the Far East.
Working with plants worldwide Blackwood operates in US Dollars (USD).
The summary will look at the USD against the Chinese Renminbi (RMB) and review the economic landscape, what has effected the RMD/USD exchange rate and the effect it has had on Blackwood Engineering’s business operations.
Chinese RMB: Overview
This currency pair represents the US Dollar against offshore Chinese Renminbi. The Renmibi is also often referred to as the Yuan and uses the letters CNY when trading inside of China. The Yuan used to be pegged to the US Dollar but is now allowed to trade against the reserve currency on a daily basis.
China is the world’s largest exporter and remains the second largest economy, behind the United States. China has used its control over its exchange rate to help ward off global financial crisis and maintain its leading trade position.
Inflation Pressures
Despite this, since April 2022 the exchange rate has fallen by 14%, this drop can be attested to the rise in inflation we have seen worldwide. Due to Americas Federal Reserve increasing interest rates in the attempt to stabilise inflation, it has caused China’s central financial institutions to follow suit in the attempt to stabilise the Yuan. However, given that China has a much weaker financial system it didn’t respond well to this tighter monetary policy.
China is currently undergoing a massive property market crash, at its peak the property market accounted for a quarter of their economic output. However, this year property sales are down by as much as 30%, in-progress developments are not being completed and the people are banding together to stop mortgage payments. Despite low incomes, the house prices being paid in Beijing and Shanghai are comparable to those of New York and San Francisco.
Nevertheless, a financial crisis is unlikely because all the major banks are state owned and as a result won’t be allowed to fail. In terms of foreign investment, there is limited exposure as only 5% of Chinese equities are held by foreigners so although they might make a small loss it won’t be catastrophic. Furthermore, there is a very high rate of saving within Chinese households, meaning interest payments should be of no issue, unlike what was seen in 2008.
COVID-19
Not only this, but China is still suffering from COVID-19 with over 30,000 active cases meaning that lockdowns are still being imposed and mass testing is ongoing.
This creates uncertainty amongst investors meaning the level of investment has fallen and thus had a negative knock-on effect to the overall GDP. Nomura, the Japanese securities firm, lowered its expected yearly growth down to 2.8% from 2.9%, which is much lower than Chinas official target of 5.5% for this year, this further decreases confidence.
However, Chinas cabinet has acknowledged the pressure on the economy and has stated that it will use timely cuts in the reserve requirement ratio (RRR) to maintain a stable level of liquidity. (The RRR is the minimum amount of money a commercial bank must keep liquid).
This will allow for the Chinese commercial banks to have more money available to lend, which can create a money multiplier effect in the economy, encouraging economic growth as there is more money circulating within the economy. Despite this, since 2018 the central bank has slashed the RRR 13 times, taking the average from 15% to 8%, which has pumped 10.8trillion Yuan ($1.51trillion) into the Chinese economy, therefore taking the effectiveness of this monetary policy into question.
Effect on Blackwood
This has had a knock on effect for Blackwood as the business trades with several partner foundries in China
The rising exchange rate has had an impact on the businesses commodity costs,. In recent times, these have been higher than other Far East territories we produce parts in (Correct as of January 2023).
However, we have developed a supplier base has expanded outside of China to mitigate this risk and ensure we deliver a sensibly priced castings and counterweights for our customers.
Final Thoughts
It’s difficult to see a price recovery coming in the short-term from this all-time low. Current levels of global inflation are resulting in increased interest rates, which the Chinese financial system cannot currently handle.
Furthermore, investor confidence is low due to the large amount of ongoing COVID-19 cases, hindering any potential economic growth despite the change of strategy from the Chinese Government relaxing restrictions. It remains unclear to see how the RMB recovers in the mid to long term.
