'The Chinese are trying to internationalise the yuan'

The world's second largest economy, China, has made news for a variety of reasons of late: gyrations in its property and equity markets, an economic slowdown that looks set to weigh on global growth to its recent steps that led to some devaluation of its currency, the renminbi (also called the yuan).But one China bull, Shaun Rein, MD of China Market Research, is not buying all the scary headlines that are emerging out of the country.For instance, as opposed to the larger belief that the Chinese have artificially stopped their currency from appreciating, Rein says the RMB is overvalued by 6-10 percent, and recent steps by the government to move to a more managed float regime would cause it to fall."A lot of the Chinese want to invest overseas [but are restricted because of convertibility laws]," he told CNBC-TV18, maintaining that China's longer term goal is the turn the currency into a global reserve currency by slowly allowing it to float.The CMR chief also commented on the equity market's moves recently, which after more than doubling between June 2014 and June 2015, has fallen about 30 percent since."The main thing is driving the slump in Chinese equities is that the market is being driven by fear and rumours that the Chinese government would stop propping up the markets," he said, adding that the HNI money -- the so-called smart money -- had exited while retail investors are now rushing to the doors.He expects Chinese shares to fall some more.Below is the transcript of the interview on CNBC-TV18.Latha: What is the sense? Yesterday it was a fairly nasty cut we saw in the equity markets, we heard about this 120 billion yuan that People\\'s Bank of China (PBOC) injected, just what is happening, is there a liquidity tightness, is there capital outflow?A: I think the main thing that caused the markets to drop so much yesterday was fear by everyday retail investors that the Chinese government was going to stop propping up the equity markets. So their unprecedented intervention from a month ago was the way to bolster confidence in the stocks that are dropping 8-9 percent every day. However as the market is stabilised, there is a sense, there are rumours that the government is going to stop propping up the market and that is resulting the sell off and people wanted to sell before the government did.Latha: Do you expect more of this fear psychosis to continue? A: I think the market still is being driven by fear and rumour. Everyday retail investors are starting to trade based on what the guy next of them is doing or what they think that the government is going to do. What is key is that a lot of the wealthier investors have exited the market in the last three or four weeks and so a lot of the times right now, it is the everyday retail investors who are in their well mid-income level that have kept their cash in. So, when you see the market volatility, it is going to just get more because a lot of these guys are going to go in and out.Sonia: You are saying it is the institutional investors, the high networth individuals (HNIs) that have exited the Chinese market and not the retail investors yet? A: The high networth individuals, people where 10 million rmb which is about USD 1.8 million in assets invested in the market, when we interviewed them, a large portion of them had sold everything or sold large portions of their stock three or four weeks ago once the government intervened. That was their way to sort of take their wins over the last year without losing any more because it tended to be more the smaller players who started investing in April-May and they actually didn’t make as much money as the guys who are richer who probably were invested over year ago.Latha: What is the view on the currency, left to itself, might it fall very sharply unless the PBOC intervened in favour of the currency? A: I have always been arguing for many years now that the renminbi is actually overvalued and actually there could be depreciation if you are going to go to a free convertability and unpeg everything. The real reason is that a lot of Chinese want to be able to take their money offshore. They want to be able to invest in India or invest in the United States and they can’t right now because of the currency restriction. So, I think the renminbi is overvalued about 6-10 percent. I don’t expect it to go up like this, drop like that and then next few months the government is going to intervene. They want to sort of have more of a stabilised rate but I don’t think that they were devaluing the currency to boost up the exports, I think it was partially that but I think a bigger part which moved towards more market reforms because they really want the rmb to become a reserve currency. If you see the International Monetary Fund (IMF) and a lot of the other governmental, non-governmental type organisations approved and applauded what China did with its currency last week. However, I don’t see a major slide any time soon. Sonia: We were getting some comments from Ruchir Sharma of Morgan Stanley yesterday where he said that the next global recession when it comes will be made in China. So he is worried that this China issue will balloon into a global recession. Would you concur with that view?A: I have disagreed with him for many years and he has been proven wrong. He has been far too negative on Chinese growth story over the last 5-10 years. I think there is some truth in what he says that if China were to slow down dramatically then that would impact the rest of the world. Because a lot of Fortune 500 firms, a lot of global economies are generating – 30 percent of worldwide growth last year came from China. So, there is some truth that if China were to catch a cold, it would have global repercussions. However, in general the Morgan Stanley guys are far too bearish and he is over estimating the issues with [Chinese] debt and how that can be worked through the system. Latha: Your own call about the Chinese economy? You think for countries like India there this huge problem of cheap Chinese tyres, Chinese steel, every other Chinese good flooding in and the devaluation is only exacerbating these fears? Will that continue, China unable to consume itself and becoming this huge exporter of everything from tyres to steel?A: I actually wrote a book called End of Cheap China. So China is no longer a cheap place to manufacture right now. What you see is a lot of light industry has already moved to Indonesia, Sri Lanka, even Africa -- things like towel or shoes. China is still going to maintain its dominance in manufacturing, it is just going up the value chain. So, I don’t think a weakened currency is going to help China dramatically because they are winning on export not from currency but because they have better quality, they have fields of scale and much better logistics. The port systems and the high speed trains here are unparallel in history and that is something that you are not going to be able to find easily in Vietnam. I don’t see a currency war starting from this.