We are holding some Renminbi hedged assets, so we were happy to see it break through the 640 mark recently, but our big concern is strategically how far RMB can go and how quickly. There is a reason why China accumulated so much US debt and that is because it did not want to convert that and therefore see its own currency strengthen, in the same way that Japan has done over the years. Germany thought it had found its way around that eternal exporters problem by the Euro, but then it found out that that solution maybe was not as great as it could be. I think that we expect RMB to strengthen; it has to strengthen. The inflationary pressures on China are so great now that letting the Renminbi strengthen is the lesser of two evils, but there is a limit to how far and how quickly it can let that happen, but we are happy to take that and ride up gradually with it.
It is so difficult for China because of the size of its US Dollar holdings, accumulated over the years - what is there that is large enough and liquid enough to actually go and buy with it? China has been playing around the margins by diversifying into hard assets and it can just stop re-buying treasuries once they mature, but it is really difficult to make a major move overnight. The size of the Dollar holdings and the size of the T-Bill holdings are just so large that you risk imploding the entire market, and they do not want to do that. It is obviously suited China to buy more Euros in recent times but I do not necessarily think that is a currency choice so much as a trading strategy. It has been exporting a lot more to the Eurozone and receiving Euros, so it has just been sterilising those export proceeds that it has been receiving rather than risk the appreciation associated with converting export proceeds into Renminbi. While this has delayed appreciation it has created huge upward pressures.
In addition, I think we are seeing a lot more interest in the Singapore Dollar, internationally. A couple of years ago, people were not really talking about the Singapore Dollar as an asset allocation choice, and now we are seeing a lot of international money managers, including our main affiliated managers, Martin Gray and Scott Campbell, talking about the Singapore Dollar. I think that this is for good reason. If you look at the fundamentals, the growth is in South East Asia. If you are going to invest in South East Asia, the first place you are going to go to is Singapore. Hong Kong has historically also been a conduit into Asia, but with Singapore, the Dollar is more freely traded, although the Hong Kong Dollar peg coming off is another interesting idea. There are good reasons for investing in the Singapore Dollar. Steady appreciation is a good place to be right now. Take the gentle current and avoid the rapids.