Has China’s renminbi unseated the Japanese yen as the new “safe haven” currency in Asia? Some market commentators have adopted this view given the renminbi’s recent strength, intensifying geopolitical tensions in Asia and Japan’s proximity to North Korea.
It’s true the renminbi has been the best-performing Asian currency this year, and it shares some hallmarks of currencies traditionally perceived as “safe havens,” but I’m not convinced. I believe the renminbi’s recent strength is less about investors viewing the currency as a stalwart in troubled times and more about policy changes from the People’s Bank of China (PBOC). I also don’t think the renminbi is of better “safe haven” status than the yen. Let’s take a more nuanced look at the currency:
The PBOC has taken steps to assert more control over the currency
In May, the PBOC introduced a new “countercyclical variable” to help reduce the renminbi’s short-term volatility versus the US dollar. This new countercyclical variable process reinforces Chinese authorities’ ability to influence the currency, adding another undisclosed variable on top of the prior day’s closing price to set the day’s benchmark.
This move was significant because it signaled the PBOC wanted to look through short-term gyrations in the renminbi that were inconsistent with what it deemed to be the currency’s “fair value.” I interpreted this to imply that the PBOC felt the renminbi was back at a level more consistent with fair value after nearly two years of depreciation in real effective exchange rate (REER) terms. Simply, the PBOC was done allowing the renminbi to depreciate in REER terms. In my view, this policy change is the main reason behind the currency’s recent strength.