American politicians have always maintained that Chinese Yuan (CNY) is undervalued, thus resulting in Chinese exports having unfair advantage over other countries’ exports. Has the Chinese central bank taken action to address this concern?
Let’s take a look at US dollar against Chinese Yuan pairing (USD/CNY) and review the exchange rates since 2005. 2005 was chosen because it was the year when China allowed CNY to float within a narrow margin of fixed base rate.
When it was pegged to USD up till mid 2005, the USD/CNY rate was 8.2765 (1 USD buys 8.2765 CNY). Between mid 2005 and mid 2008 (in 3 years), USD/CNY rate fell to 6.8217. This means that CNY strengthened by 17.5% against USD. It then stabilised at this rate for 2 years until August 2010 when the next round of appreciation of CNY occurred. For one year and eight months, CNY appreciated to touch 6.3034 on 27 April 2012. CNY strengthened by 7.6% against USD during this period. So all in, the appreciation of CNY was 23.8% since 2005.
Can we say the same for Chinese Yuan against Singapore dollar (SGD/CNY)? Based on historical data, SGD/CNY exchange rates did not resemble USD/CNY rates. It fluctuated between several peaks and troughs over the period from 2005 to now. The lowest SGD/CNY ever reached was on 23 Feb 2009 at 4.4264 (1 SGD buys 4.4264 CNY). The highest it ever touched was on 18 July 2011 at 5.3395. As at last trade, SGD/CNY was at 5.0928. Over one month period (22 Mar to 27 Apr), Singapore dollar strengthened against Chinese Yuan by 2.35%. This could be due to the Monetary Authority of Singapore (MAS) letting Singapore dollar strengthens to combat imported inflation. If you have invested in CNY during this period, you will find that your investment has lost value in Singapore dollar term.
From the above, investing in foreign currencies has its uncertainty. You have to accept the risk besides the rewards when investing in foreign currencies.
Copyright © 2012, limkimtong for Living Investment
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