The Great Distortion ends
What’s the one indicator you should be watching all the time? Alan Greenspan admitted a few years ago (under pressure) that for him it is the gold price. But this week, CLSA macro guru Russell Napier suggested to me that, in the short term at least, it should be something else: the renminbi currency band.
Why? Because the fact that the Chinese currency has been undervalued for the last 18 years, and the efforts the Chinese authorities have made to keep it that way, have been among the biggest drivers of events over the last decade. And that might be about to change.
To see how, we need to go back to 1994. China’s foreign currency reserves came to around $17bn and the renminbi was pegged one-to-one to the dollar. That worked fine for a while. Then several things changed. China was accepted into the World Trade Organisation and, in the wake of the Nasdaq crash, the US dollar started to weaken significantly. The result, initially, was great for China. Exports doubled and doubled again. The current and capital-account surpluses soared and the overseas sector became a major driver of growth.
• Read the full editor’s letter here: The Great Distortion ends.