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Yuan not ready for return to uptrend
By Wang Tao |
November 5, 2012, Monday
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Print Edition
Print Edition
IN recent weeks, the Chinese yuan has risen visibly against the US dollar.
While the more than 2 percent appreciation since end-July is nothing in the context of volatile international foreign exchange markets, it has attracted a lot of investor attention given the timing of the move, the prolonged weakness of the yuan during much of the year prior to this period, and the fact that there are still depreciation expectations in the forward market.
Has China's exchange rate policy changed? Is the yuan back on the appreciation path?
We do not think so. We reiterate our earlier call that the US dollar/yuan exchange rate would stay largely range bound at around 6.3 with increased two-way volatility.
In other words, we are looking for the exchange rate to move largely in the 6.2-6.4 range in the next 12 months.
Why wouldn't the yuan appreciate more? We believe that fundamentally, the yuan is no longer much under-valued.
China's current account surplus has dropped below 3 percent of gross domestic product in 2011 from the 2007 peak of 10 percent, and is expected to stay below 3 percent in the coming years.
Estimates based on mainstream methods (including the macroeconomic balance approach used by the Peterson Institute) would confirm that the yuan is no longer significantly undervalued. Furthermore, the market does not believe the yuan is undervalued anymore - both the non-deliverable forward market and onshore forward market have been pricing in a weakening yuan in the past year.
Indeed, net capital inflows have turned into outflows in much of the past year partly because the exchange-rate related arbitrage has turned.
Finally, given the weak export growth, we believe the government has no appetite to let the yuan appreciate steadily and consistently.
The article was a front page summary of a UBS research report issued on October 30. The opinions expressed are her own.
While the more than 2 percent appreciation since end-July is nothing in the context of volatile international foreign exchange markets, it has attracted a lot of investor attention given the timing of the move, the prolonged weakness of the yuan during much of the year prior to this period, and the fact that there are still depreciation expectations in the forward market.
Has China's exchange rate policy changed? Is the yuan back on the appreciation path?
We do not think so. We reiterate our earlier call that the US dollar/yuan exchange rate would stay largely range bound at around 6.3 with increased two-way volatility.
In other words, we are looking for the exchange rate to move largely in the 6.2-6.4 range in the next 12 months.
Why wouldn't the yuan appreciate more? We believe that fundamentally, the yuan is no longer much under-valued.
China's current account surplus has dropped below 3 percent of gross domestic product in 2011 from the 2007 peak of 10 percent, and is expected to stay below 3 percent in the coming years.
Estimates based on mainstream methods (including the macroeconomic balance approach used by the Peterson Institute) would confirm that the yuan is no longer significantly undervalued. Furthermore, the market does not believe the yuan is undervalued anymore - both the non-deliverable forward market and onshore forward market have been pricing in a weakening yuan in the past year.
Indeed, net capital inflows have turned into outflows in much of the past year partly because the exchange-rate related arbitrage has turned.
Finally, given the weak export growth, we believe the government has no appetite to let the yuan appreciate steadily and consistently.
The article was a front page summary of a UBS research report issued on October 30. The opinions expressed are her own.
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