Don't look at USD/CNY=7, look at 1000%
Updated 23:16, 05-Aug-2019
Chen Jiahe

Editor's note: Chen Jiahe is the chief strategist at Cinda Securities. The article reflects the author's opinion, and not necessarily the views of CGTN.

The breaking news in the global financial market today is that the exchange rate between USD and CNY rose to the seven territory. Almost everyone in the market is talking about this as if this change will determine the investment return of all asset classes.

This is simply not the case, and there is nothing to worry about the exchange rate.

Although CNY did depreciate slightly against the USD since the starting of the trade dispute, this does not mean China’s capital account is out of control. Since the April 2018, the total depreciation of CNY against USD is merely around 10 percent. Meanwhile, during the same period, CNY appreciated against many other currencies, such as GBP, AUD, KRW, etc. On the other hand, the USD index rose at an even larger extent. Therefore, it is more accurate to correct the sentence "The CNY has depreciated against the USD" as "The USD has appreciated against many currencies".

VCG Photo

VCG Photo

Meanwhile, China is still very abundant with its foreign reserve and bears little foreign debt. A country with absolute sovereignty with its own financial balance sheet will not generate any foreseeable international financial crisis. A slight depreciation of its currency means little to the devaluation of its investment value.

The usual misunderstanding of the public is that the depreciation of a country's currency always leads to investment losses and appreciation always leads to investment gains. The fact can be just opposite.

Appreciation of a country's currency can make the country’s economy lose competitiveness in the global market, just like Japan experienced in the late 1980s. Meanwhile, slight depreciation of the currency can boost export and domestic consumption, therefore increase the competitiveness of an economy.

Furthermore, for those veteran investors, they should know that the gap between potential investment returns in China and the average situations of the global market can be so tremendous that the fluctuation of exchange rate adds very little to it.

Currently, one can find marvelous investment opportunities in China, especially the Hong Kong equity market. Due to the temporary lacking of confidence in the market, you can easily spot good companies with strong comparative advantages in their own industries trading at less than six times price-earnings ratio and over seven percent dividend yield. Investing in such kind of companies can return investors abundantly.

A man sits in front of a board showing market information at a securities brokerage house in Beijing, China, August 5, 2019. /VCG Photo

A man sits in front of a board showing market information at a securities brokerage house in Beijing, China, August 5, 2019. /VCG Photo

The capital market in China has another trait that can return those veteran investors well. China is a developing market. According to the modern financial theory, this means the market is not efficient enough to price everything accurately. For those experienced investors, it is much easier to find mis-priced investment targets in China compare with matured markets such as North America and Europe.

In the past decade, legendary local fund managers such as Mr. Chen Guangming and Mr. Cao Mingchang has delivered their fund holders with around 1,000 percent investment returns. These great investment records were achieved in just around ten or fifteen years. My friends who are managing public's money in London and New York cannot believe these records as they significantly outperform even the best fund managers in the matured markets. Only the most unconscious investors will give up such great investment opportunities because of a little fluctuation of the exchange rate.

For those veteran investors, they will realize that China is such a great market where there is stable political environment, free and competitive market, huge number of consumers, great economic stamina and potential, low equity valuation and inefficient market pricing mechanism. It is a market that provides the foundation for first-class investment results in the world and it is a market where the most legendary investors of this century will be born. 

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