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Wednesday, 28 October 2009
China Needs ‘Unexpected’ One-Off Yuan Appreciation
China should allow an immediate one- off appreciation in the yuan’s value and widen the currency’s trading band to stem inflows of speculative capital that may fuel inflation, said UBS AG economist Wang Tao.
China Needs ‘Unexpected’ One-Off Yuan Appreciation
By Bloomberg News 27 October 2009
China should allow an immediate one- off appreciation in the yuan’s value and widen the currency’s trading band to stem inflows of speculative capital that may fuel inflation, said UBS AG economist Wang Tao.
“China’s economic fundamentals mean that the yuan should strengthen,” Beijing-based Wang said in a phone interview yesterday. “The central bank will find it harder to manage liquidity and inflation when a flood of speculative funds returns, betting on the yuan’s appreciation.”
The Chinese economy grew at the fastest pace in a year in the second quarter and export declines slowed in September, fuelling speculation that policy makers will let the yuan resume appreciation against the dollar. China’s cabinet, the State Council, said Oct. 21 that managing liquidity is increasingly difficult and signalled that inflation concerns will play a greater role in setting policy.
Policy makers should do “the unexpected,” countering perceptions that the currency is a one-way bet, before expectations for gains strengthen, Wang said. She didn’t say how much the currency should immediately appreciate.
Yuan forwards, which rose to a 14-month high last week, suggest the currency will gain 2.3 percent against the dollar in the coming year. The 12-month offshore contracts weakened 0.5 percent today to 6.6760, paring their increase since June 30 to 1.2 percent. The yuan climbed 21 percent over three years after the government scrapped a fixed exchange rate in July 2005.
Yuan Convertibility
Stephen Roach, chairman of Morgan Stanley Asia, predicted today that China will “ultimately” allow the yuan to be freely convertible to other currencies. In an interview with Bloomberg Television in Hong Kong, Roach added that the Hong Kong dollar’s peg to the U.S. currency “will relax” after China makes the yuan convertible.
While Chinese officials, including central bank Governor Zhou Xiaochuan, have called this year for an alternative to the dollar as the world’s main reserve currency, they maintain controls on the yuan that prevent it for now from becoming a competitor.
The yuan rate is facing appreciation pressure due to the growing size of China’s foreign-currency reserves and its economy, which may surpass Japan in the next two years, said Jiang Jianjun, a deputy division chief in the foreign trade department of the Ministry of Commerce, at an online forum today. Still, the exchange rate won’t see any major adjustment until China’s exports recover “notably,” he said.
Policy Adjustment?
China will likely seek to slow capital inflows by convincing speculators they don’t stand to make large returns, rather than allowing a one-off appreciation, said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong.
“China will need to be very careful,” he said. “It needs to communicate to the market that yuan appreciation will be limited to about 5 to 6 percent a year. The danger in the past was expectations of appreciation attracted hot money.”
China’s financial system is flooded with cash from a record $1.27 trillion of new lending this year, the trade surplus, foreign direct investment and inflows of speculative capital, or so-called hot money, adding to the risk of asset bubbles.
The nation’s foreign-exchange reserves rose $141 billion in the third quarter to a record $2.273 trillion, following an unprecedented $178 billion increase in the previous three months.
Wang at UBS said she doesn’t expect policy makers to take her advice. She sees the yuan staying pegged to the U.S. currency for six to nine months as the government continues to protect exporters, then rising to as much as 6.4 per dollar by the end of 2010. That would be a gain of about 6.7 percent from yesterday’s closing level of 6.8278 in Shanghai.
“Foreign-exchange inflows will force more liquidity into the financial system, making it more difficult for the central bank to manage inflation and control asset bubbles,” Wang said.
Central bank vice governor Ma Delun warned on Oct. 20 that policy challenges will increase as expectations for a stronger yuan boost inflows of capital. The State Council said Oct. 21 that China needs “to better manage inflationary expectations.” Consumer prices gained for a second month in September from August, rising 0.4 percent.
The yuan is allowed to trade 0.5 percent on either side of a daily reference rate against the dollar set by the central bank, a limit that could be raised to 1 percent or 3 percent to increase uncertainty, the economist said.
China’s currency has stayed at about 6.83 per dollar for the past 15 months as the government shields exporters from a slump in world trade. In September, exports fell by the least in nine months, suggesting that demand is starting to revive.
A more flexible Chinese currency is needed for “a stronger, more balanced global economy,” the U.S. Treasury said in a report to Congress, released Oct. 15, that called the yuan “undervalued.” China is “stealing jobs” from other countries and undermining the global recovery by keeping the yuan pegged to the U.S. currency, Nobel laureate Paul Krugman wrote in the New York Times last week.
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China Needs ‘Unexpected’ One-Off Yuan Appreciation
By Bloomberg News
27 October 2009
China should allow an immediate one- off appreciation in the yuan’s value and widen the currency’s trading band to stem inflows of speculative capital that may fuel inflation, said UBS AG economist Wang Tao.
“China’s economic fundamentals mean that the yuan should strengthen,” Beijing-based Wang said in a phone interview yesterday. “The central bank will find it harder to manage liquidity and inflation when a flood of speculative funds returns, betting on the yuan’s appreciation.”
The Chinese economy grew at the fastest pace in a year in the second quarter and export declines slowed in September, fuelling speculation that policy makers will let the yuan resume appreciation against the dollar. China’s cabinet, the State Council, said Oct. 21 that managing liquidity is increasingly difficult and signalled that inflation concerns will play a greater role in setting policy.
Policy makers should do “the unexpected,” countering perceptions that the currency is a one-way bet, before expectations for gains strengthen, Wang said. She didn’t say how much the currency should immediately appreciate.
Yuan forwards, which rose to a 14-month high last week, suggest the currency will gain 2.3 percent against the dollar in the coming year. The 12-month offshore contracts weakened 0.5 percent today to 6.6760, paring their increase since June 30 to 1.2 percent. The yuan climbed 21 percent over three years after the government scrapped a fixed exchange rate in July 2005.
Yuan Convertibility
Stephen Roach, chairman of Morgan Stanley Asia, predicted today that China will “ultimately” allow the yuan to be freely convertible to other currencies. In an interview with Bloomberg Television in Hong Kong, Roach added that the Hong Kong dollar’s peg to the U.S. currency “will relax” after China makes the yuan convertible.
While Chinese officials, including central bank Governor Zhou Xiaochuan, have called this year for an alternative to the dollar as the world’s main reserve currency, they maintain controls on the yuan that prevent it for now from becoming a competitor.
The yuan rate is facing appreciation pressure due to the growing size of China’s foreign-currency reserves and its economy, which may surpass Japan in the next two years, said Jiang Jianjun, a deputy division chief in the foreign trade department of the Ministry of Commerce, at an online forum today. Still, the exchange rate won’t see any major adjustment until China’s exports recover “notably,” he said.
Policy Adjustment?
China will likely seek to slow capital inflows by convincing speculators they don’t stand to make large returns, rather than allowing a one-off appreciation, said Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong.
“China will need to be very careful,” he said. “It needs to communicate to the market that yuan appreciation will be limited to about 5 to 6 percent a year. The danger in the past was expectations of appreciation attracted hot money.”
China’s financial system is flooded with cash from a record $1.27 trillion of new lending this year, the trade surplus, foreign direct investment and inflows of speculative capital, or so-called hot money, adding to the risk of asset bubbles.
The nation’s foreign-exchange reserves rose $141 billion in the third quarter to a record $2.273 trillion, following an unprecedented $178 billion increase in the previous three months.
Central Bank
Wang at UBS said she doesn’t expect policy makers to take her advice. She sees the yuan staying pegged to the U.S. currency for six to nine months as the government continues to protect exporters, then rising to as much as 6.4 per dollar by the end of 2010. That would be a gain of about 6.7 percent from yesterday’s closing level of 6.8278 in Shanghai.
“Foreign-exchange inflows will force more liquidity into the financial system, making it more difficult for the central bank to manage inflation and control asset bubbles,” Wang said.
Central bank vice governor Ma Delun warned on Oct. 20 that policy challenges will increase as expectations for a stronger yuan boost inflows of capital. The State Council said Oct. 21 that China needs “to better manage inflationary expectations.” Consumer prices gained for a second month in September from August, rising 0.4 percent.
The yuan is allowed to trade 0.5 percent on either side of a daily reference rate against the dollar set by the central bank, a limit that could be raised to 1 percent or 3 percent to increase uncertainty, the economist said.
China’s currency has stayed at about 6.83 per dollar for the past 15 months as the government shields exporters from a slump in world trade. In September, exports fell by the least in nine months, suggesting that demand is starting to revive.
A more flexible Chinese currency is needed for “a stronger, more balanced global economy,” the U.S. Treasury said in a report to Congress, released Oct. 15, that called the yuan “undervalued.” China is “stealing jobs” from other countries and undermining the global recovery by keeping the yuan pegged to the U.S. currency, Nobel laureate Paul Krugman wrote in the New York Times last week.
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