beyondbrics

By Ousmene Mandeng, Head of Public Sector Investment Advisory at Ashmore Investment Management

The adjustment of the renminbi exchange rate regime is seen to have a broader impact on emerging markets more generally and could lay the foundation for a sustained appreciation of emerging markets currencies. China must however be concerned that its currency move does not unduly favour its competitors; the post-crisis environment has left most Asian currencies still at levels more lower relative to the renminbi.

As China effectively announced an exit from its mini Bretton Woods arrangement of a fixed exchange rate with the US dollar, it follows that perhaps China, like Europe at the time of the collapse of Bretton Woods, should seek a successor arrangement along the lines of the Snake.

The most ambitious Emerging Snake could include next to the renminbi, the Korean won, Taiwanese dollar, Brazilian real, Indian rupee, Russian rouble and Singapore dollar. A softer version could have next to the renminbi, the Korean won, Taiwanese dollar, Malaysian ringgit and Thai baht.

The original Snake was established to maintain stable exchange rates among the European Economic Community (EEC) currencies following the collapse of Bretton Woods in August 1971. The goal was to foster continued economic integration among the EEC and maintain the key features of Bretton Woods, while also implementing a single currency band. The Snake became operational in April 1972 and stipulated that EEC exchange rates should not fluctuate more than 4.5 percent against each other. The mechanism was broadly maintained through 1979 leading up to the adoption of the European Monetary System.

But the Snake was difficult to maintain and conditions were made worse by the oil price shock and cyclical downturn of the international economy at the time. Policy divergence between stability-conscious Germany and other Snake members made maintenance of parities difficult even though it provided for regular exchange rate realignments and exchange market intervention assistance to some extent. For all the problems it caused, however, and while intra-EEC currency volatility was higher under the Snake than under Bretton Woods, it probably would have been even higher had no such arrangement existed.

An Emerging Snake, with the Chinese renminbi at its core together with other key emerging markets currencies, could help to preserve inter-emerging markets stability to promote emerging markets integration. The willingness for greater monetary cooperation seems to be there at least within Asia, as witnessed by the Chiang Mai initiative. While the challenges in emerging markets are substantial for a credible currency accord, unlike in Europe at the time of the Snake, they have the growth momentum and also the international reserve power to give it substantial support. For investors, an Emerging Snake, even a far flung derivative, would be expected to bring forward sustained appreciation of key emerging markets currencies against the dollar and other advanced economies’ currencies. If it happens it would likely be the biggest structural trade since euro convergence.