Fri, Sep 19, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Asia Pacific Intelligence

Stratton Street predicts China and Australia currency link will be first of many

Thursday, June 13, 2013

Andy Seaman

May saw China and Australia agree a deal to directly trade the Australian dollar and the renminbi. Andy Seaman, Partner and Portfolio Manager, Stratton Street, explains that this means that rather than foreign exchange between the two countries going via US dollars, the currencies can be directly converted, something that previously was only possible with the renminbi and the yen. The Reserve Bank of Australia, Australia's central bank, is the first to sign up and has put 5% of its foreign exchange reserves into the renminbi.

Seaman explains that this might have come as a surprise to people in the markets here but other central banks are queuing up to do just the same. "This is a trend that will continue" he says, with the Banque de France and the Bank of England also keenly creating links with China, albeit constrained on what they can do with their foreign exchange reserves.

"The renminbi has come from nowhere" Seaman explains but by 2015 it is predicted to have a trading volume of $1tln a day and be standing at number three in the world's most actively traded currencies. Globally, 12% of China's trade is now settled in renminbi. "If recent initiatives are able to boost trade in renminbi to match either the current - 12% - level of trade settled in renminbi seen other parts of the world, or approach the one third level within a few years, then this would represent a sizeable change which can only be positive for Australia".

China is Australia's largest export market accounting for just under a third of Australia's exports so there is clearly a strong incentive for Julia Gillard's government to develop strong relations with Beijing.

If the predicted growth in the strength of the renminbi is correct the currency will exceed the projected daily trading volume of the Australian dollar, Sterling and Singapore dollar combined by 2015. "This is more a story about the rapidly growing importance of the renminbi in global financial markets of which Australia plays an important, but small part, than it is a story about Australia" Seaman says.

Stratton Capital's Renminbi bond fund has seen similar stratospheric growth, launching in 2007 with just $2m under management and now standing at $385m. Performance since launch clocks in at 92.96% and it stands at the top of bond fund league tables over five and three years.

The Chinese bond market is still restricted, unless you have a quota so access is limited, pushing custom through Stratton Street's fund approach, which is based on dollar bonds hedged into renminbi.

Seaman holds strong views on the Aussie dollar. "Australia holds the dubious distinction of having run a current account deficit for the past 30 consecutive years. Put another way, the country has been consuming more than it earns for three decades and has borrowed from abroad to finance its overconsumption. The net result is that the country as a whole owes more than 50% of GDP to foreigners or, put another way, the net foreign liabilities of the country are in excess of 50% of GDP. Countries with debts above that threshold frequently get into trouble and often see very sharp falls in their exchange rates" he says.

"We consider any country with net foreign liabilities in excess of 50% of GDP and rising to have unsustainable debt dynamics and be not worthy of an investment grade rating. It will come as shock to many when the country loses its Aaa rating, which we regard as inevitable if the country continues to spend more than it earns."

In comparison, China has enormous overseas assets, runs a current account surplus and market rates are around 2.5% in the offshore CNH currency market. Seaman reports that it is also a far more stable currency with longer term volatility being around one tenth of that of the Australian dollar.

(This piece first appeared in Opalesque, May 16th)

 
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
Asia Pacific Intelligence
Asia Pacific Intelligence
Asia Pacific Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. SEC charges 19 investment firms and one trader for breach of Rule 105[more]

    Benedicte Gravrand, Opalesque Geneva: The Securities and Exchange Commission (SEC) started a push to enhance the enforcement of Rule 105 of Regulation M last year to uncover hedge funds and private equity firms that have illegally participated in an offering of a stock after short selling it duri

  2. Fund managers, bullish on Europe, anticipate monetary policy separation of Fed and ECB[more]

    Komfie Manalo, Opalesque Asia: At least 202 fund managers with $556bn of assets under management said that while the European Central Bank (ECB) has eased its monetary policy that sent sentiments towards Europe to pick up, the Fed is expected to hike its rate in the spring of 2015. Investor

  3. Institutions - North Carolina workers call on state pension to dump up to $6bn in hedge funds, UK pension fund criticizes hedge fund fees[more]

    North Carolina workers call on state pension to dump up to $6bn in hedge funds From Forbes.com: The State Employees Association of North Carolina this afternoon called on state Treasurer Janet Cowell to withdraw all investments in hedge funds, which appear to amount to approximately $6 b

  4. News Briefs - Limited partners of investment managers may be subject to self-employment taxes, Just one week left until NYC's Rocktoberfest[more]

    Limited partners of investment managers may be subject to self-employment taxes On September 5, 2014, the Internal Revenue Service (“IRS”) issued Chief Counsel Advice 201436049, concluding that members of an investment manager were subject to self-employment taxes with respect to their e

  5. Institutions - Adviser's faith in hedge funds unshaken by CalPERS' move Advisers weigh in on CalPERS’ decision, Gina Raimondo sees no reason to follow California’s lead, exit hedge funds, Danish pension funds step up 'alternative investments'[more]

    Adviser's faith in hedge funds unshaken by CalPERS' move From WSJ.com: Financial advisers who use hedge funds in their clients' portfolios say they aren't rethinking that approach after a huge California pension fund announced plans to exit the hedge-fund market. The decision by the Cali