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Yuan’s Gain Against Euro May Delay China Ending Peg (Update1)

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Yuan’s Gain Against Euro May Delay China Ending Peg (Update1)


By Bob Chen and Shamim Adam

April 28 (Bloomberg) -- The yuan’s climb to a one-year high against the euro will erode China’s competitiveness in its largest export market and delay an end to its currency’s peg against the dollar, said UniCredit SpA and Societe Generale SA.

Forward contracts on the currency fell after debt-rating downgrades of Greece and Portugal yesterday deepened concern that a sovereign-credit crisis will hamper a global economic recovery. The European turmoil may buttress Premier Wen Jiabao’s reticence to abandon the yuan’s peg to the dollar, adopted in July 2008 to shield exporters from the world recession.

“Chinese authorities have said all along that they are concerned about the stability of the global recovery,” said Joe Craven, Asia-Pacific head of currencies and fixed income at UniCredit in Hong Kong. “Given what’s happening presently in Europe, the likelihood of them doing anything in the short term is smaller.”

The yuan strengthened 1 percent today to 8.9955 per euro, the biggest gain since March 24, bringing its advance over the past six months to 12 percent. Twelve-month non-deliverable forwards fell 0.1 percent to 6.6211 per dollar, 3.1 percent stronger than the spot rate of 6.8258.

China’s policy makers have indicated they are waiting for clearer signs of a sustained global rebound before deciding to let the yuan gain. Evidence of a “very certain” recovery is needed before China can roll back stimulus measures adopted during the crisis, central bank Governor Zhou Xiaochuan said in an interview last month in San Jose, Costa Rica.

Spreading Crisis

Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs across the euro zone.

As German Chancellor Angela Merkel delays approval of a 45 billion-euro ($59 billion) Greek rescue package, the debt crisis is spreading. Portugal’s benchmark stock index yesterday fell the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds rose to a 10-month high.

“I don’t see how China would strengthen their currency amid the meltdown of European sovereigns,” said Robert Reilly, co-head of Asian fixed income and currencies flow business at SocGen in Hong Kong. “From a trading point of view, I think appreciation will be delayed.”

Global Effort

U.S. officials have led an increasingly global effort to press China’s government to let the yuan appreciate against the dollar. The central bank chiefs of India and Brazil joined the call this month, while the issue wasn’t mentioned in a Group of 20 communique last week.

Treasury Secretary Timothy Geithner, who has been pushed by American lawmakers to declare China a manipulator of its currency, said in Washington April 23 that “it’s in their interest” to shift to a more flexible currency. The International Monetary Fund said last week slowing credit growth and a stronger yuan would help cool “excess demand pressures.”

The yuan should be allowed to appreciate “slowly and gradually” with a wider trading band and more flexibility “over the medium and long term,” Li Daokui, an adviser to China’s central bank, said this month.

“It’s events like these in Greece that will make the Chinese cautious,” said Bill Belchere, global chief economist at Mirae Asset Securities in Hong Kong. “It raises the possibility that perhaps things are not as good as we would like to believe.”

Exports to Europe

China’s exports to Europe had been surging with the recovery in global trade prior to the flaring of sovereign- credit concerns.

China exported $21.45 billion of merchandise to the European Union in March, a 24.6 percent increase from a year earlier, Chinese customs bureau data shows. The EU accounts for the biggest share of China’s $112.11 billion of exports last month. Shipments to the EU compared with $19.33 billion of exports to the U.S.

“The turmoil in Greece shows that China is justified in wanting the global economic recovery to be entrenched before it makes any adjustments to its currency,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. “Officials in Beijing know very well there is still a lot of volatility in global markets.”

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