Yuan rebounds for longest period in 4 years
By Feng Jianmin |
October 24, 2012, Wednesday
|
Print Edition
Print Edition
THERE has been something unusual recently about the Chinese yuan's exchange rate.
The currency is rebounding for its longest stretch in four years. Whereas it used to be enough to simply watch the central parity rate set by the People's Bank of China, the spot trading price of the yuan now matters.
In recent weeks, the yuan has consistently bumped up against the upper limit of the currency's trading band against the US dollar, which was doubled in April to 1 percent on each side of the central parity rate to allow greater flexibility.
In China's interbank market, the yuan strengthened 0.21 percent last week, capping an 11-week run-up, the longest since 2008, according to the China Foreign Exchange Trade System.
The yuan briefly touched 6.2446 last Thursday, its strongest since the government unified the official and market-exchange rates at the end of 1993.
The central parity rate, however, only started to rally in the past week, strengthening from 6.3441 on October 10 to 6.3078 yesterday. Last Thursday, the central bank set the daily fixing at 6.3028, the lowest level since June 20.
Economists offered reasons for the recent spot market appreciation, but they also suggest that the future trend line of the yuan will be more difficult to predict as the currency builds up a bit of volatility.
"The yuan's nominal effective exchange rate has appreciated over 1 percent since mid-September," the Barclays research team led by Olivier Desbarres, Hamish Pepper and Nick Verdi wrote in a report on Friday. "We think these moves reflect a persistently high trade surplus, hot money inflows encouraged by diminishing tail risks to global growth and the People's Bank of China's acceptance of these flows by fixing the dollar-yuan rate at a four-month low."
Easing monetary policies in the US, European Union and Japan, and the unexpected widening of China's trade surplus in September, which hit a 44-month high of US$27.7 billion, renewed speculation that the yuan has more room to appreciate.
China's 7.4 percent GDP growth in the third quarter, though slower than the 8.1 percent in the first quarter and the 7.6 percent in the second, has helped restore confidence that China's policy of economic stimulus through infrastructure investment has helped buffer a slowdown.
Fitch Ratings said last Friday that China's current slowdown is much less abrupt than during the global financial crisis four years ago and that China's economy will avoid a hard landing.
"Given signs that economic growth was stabilizing and because the nominal effective exchange rate weakened 2.5 percent between the end of May and mid-September, the People's Bank of China may have been more comfortable in allowing a modest recovery in the yuan," the Barclays economists said.
Rate near equilibrium
The central bank also wants to meet its pledge to increase two-way fluctuation of the currency by allowing the market to play a larger role, the report added.
During the International Monetary Fund annual meeting in Japan this month, central bank Deputy Governor Yi Gang said that the yuan's exchange rate is near equilibrium and the central bank will let the market drive the internationalization of the currency.
But looking ahead, the picture is murkier. There is still no consensus about what will be the yuan's equilibrium against the US dollar, and many economists are predicting the current pace of appreciation won't last long.
One Shanghai-based trader, who declined to be identified, pointed to traces of evidence of central bank intervention in the strengthening of the yuan, as bargain-hunting corporations build their US dollars inventories.
Economists and industry people observed that the exchange rate data for the past few years also reveal a common trend, in which the yuan's central parity rate strengthened ahead of key international events, such as major US elections, G20 meetings and weighty China-US business talks. That ploy is designed to reinforce the perception that the central bank is serious about its resolve to increase the flexibility of the currency.
The same group of Barclays economists who justified the recent rally are quick to predict that the pace of the yuan's appreciation will not be sustained in the near term, given the negative impact on Chinese export competitiveness.
Zhang Ming, a researcher with China Academy of Social Sciences, said that the risks of weak foreign demand, the unresolved European debt crisis and poor profitability of domestic companies will slow down the yuan's appreciation.
"Speculation toward yuan depreciation still dominates among investors who bet on the future exchange rate," Zhang said.
That worry is reflected in the price of 12-month, non-deliverable forward contracts traded in Hong Kong, which are used to hedge risks on the yuan and are widely watched as an indicator of yuan trends. On Monday, the current contract was trading at 6.3675 yuan to the US dollar, a 1.8 percent discount to the onshore rate.
The discount has been widening in the past month as the yuan strengthened, up from 1.5 percent at early September and 1 percent in early July.
"While we project relatively modest gains for the yuan against the US dollar over the course of 2013, reaching 6.19 at year's end, both the deliverable and non-deliverable forwards now discount persistent depreciation," Standard Chartered Bank said in a Monday report.
The currency is rebounding for its longest stretch in four years. Whereas it used to be enough to simply watch the central parity rate set by the People's Bank of China, the spot trading price of the yuan now matters.
In recent weeks, the yuan has consistently bumped up against the upper limit of the currency's trading band against the US dollar, which was doubled in April to 1 percent on each side of the central parity rate to allow greater flexibility.
In China's interbank market, the yuan strengthened 0.21 percent last week, capping an 11-week run-up, the longest since 2008, according to the China Foreign Exchange Trade System.
The yuan briefly touched 6.2446 last Thursday, its strongest since the government unified the official and market-exchange rates at the end of 1993.
The central parity rate, however, only started to rally in the past week, strengthening from 6.3441 on October 10 to 6.3078 yesterday. Last Thursday, the central bank set the daily fixing at 6.3028, the lowest level since June 20.
Economists offered reasons for the recent spot market appreciation, but they also suggest that the future trend line of the yuan will be more difficult to predict as the currency builds up a bit of volatility.
"The yuan's nominal effective exchange rate has appreciated over 1 percent since mid-September," the Barclays research team led by Olivier Desbarres, Hamish Pepper and Nick Verdi wrote in a report on Friday. "We think these moves reflect a persistently high trade surplus, hot money inflows encouraged by diminishing tail risks to global growth and the People's Bank of China's acceptance of these flows by fixing the dollar-yuan rate at a four-month low."
Easing monetary policies in the US, European Union and Japan, and the unexpected widening of China's trade surplus in September, which hit a 44-month high of US$27.7 billion, renewed speculation that the yuan has more room to appreciate.
China's 7.4 percent GDP growth in the third quarter, though slower than the 8.1 percent in the first quarter and the 7.6 percent in the second, has helped restore confidence that China's policy of economic stimulus through infrastructure investment has helped buffer a slowdown.
Fitch Ratings said last Friday that China's current slowdown is much less abrupt than during the global financial crisis four years ago and that China's economy will avoid a hard landing.
"Given signs that economic growth was stabilizing and because the nominal effective exchange rate weakened 2.5 percent between the end of May and mid-September, the People's Bank of China may have been more comfortable in allowing a modest recovery in the yuan," the Barclays economists said.
Rate near equilibrium
The central bank also wants to meet its pledge to increase two-way fluctuation of the currency by allowing the market to play a larger role, the report added.
During the International Monetary Fund annual meeting in Japan this month, central bank Deputy Governor Yi Gang said that the yuan's exchange rate is near equilibrium and the central bank will let the market drive the internationalization of the currency.
But looking ahead, the picture is murkier. There is still no consensus about what will be the yuan's equilibrium against the US dollar, and many economists are predicting the current pace of appreciation won't last long.
One Shanghai-based trader, who declined to be identified, pointed to traces of evidence of central bank intervention in the strengthening of the yuan, as bargain-hunting corporations build their US dollars inventories.
Economists and industry people observed that the exchange rate data for the past few years also reveal a common trend, in which the yuan's central parity rate strengthened ahead of key international events, such as major US elections, G20 meetings and weighty China-US business talks. That ploy is designed to reinforce the perception that the central bank is serious about its resolve to increase the flexibility of the currency.
The same group of Barclays economists who justified the recent rally are quick to predict that the pace of the yuan's appreciation will not be sustained in the near term, given the negative impact on Chinese export competitiveness.
Zhang Ming, a researcher with China Academy of Social Sciences, said that the risks of weak foreign demand, the unresolved European debt crisis and poor profitability of domestic companies will slow down the yuan's appreciation.
"Speculation toward yuan depreciation still dominates among investors who bet on the future exchange rate," Zhang said.
That worry is reflected in the price of 12-month, non-deliverable forward contracts traded in Hong Kong, which are used to hedge risks on the yuan and are widely watched as an indicator of yuan trends. On Monday, the current contract was trading at 6.3675 yuan to the US dollar, a 1.8 percent discount to the onshore rate.
The discount has been widening in the past month as the yuan strengthened, up from 1.5 percent at early September and 1 percent in early July.
"While we project relatively modest gains for the yuan against the US dollar over the course of 2013, reaching 6.19 at year's end, both the deliverable and non-deliverable forwards now discount persistent depreciation," Standard Chartered Bank said in a Monday report.
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