market alert
Chinese Central Bank Implies Currency Will Strengthen
Friday, 17 September 2010 02:36 GMT | Written by Sumit Roy,
Fearing U.S. reprisals, the PBOC implied that it will quicken the pace of the Yuan’s appreciation. Some U.S. government officials are growing restless, however, threatening to slap sanctions on the “currency manipulator.”
The People’s Bank of China released its Financial Stability Report during the Friday Asia session. The central bank said that the economy will grow relatively fast, but remain stable. Even so, the PBOC will maintain a moderately loose monetary policy in the near-term, while closely monitoring price developments.
Of note was the bank’s intention to ‘quicken the adjustment of the economic structure,’ which is perhaps a reference to currency policy and meant to appease the U.S. government, which has been recently upping the rhetoric with regard to the currency situation. A stronger Chinese Yuan would likely weaken the country’s export sector, while putting the burden of growth on domestic consumption; hence, an ‘adjustment of the economic structure.’ A stronger Yuan would also help narrow the enormous trade gap between the U.S. and China.
Look for the U.S. to continue to pressure China on the currency issue. At a congressional testimony this week, U.S. Treasury Secretary Geithner said, “the pace of appreciation has been too slow and the extent of appreciation too limited.” Senator Schumer of New York went as far as to call for trade sanctions in response to China’s “currency manipulation.” In a sign that the increased pressure has had an impact, the Chinese Yuan increased to a new record level this week, and is up 0.9% over the last six days. Nevertheless, many market observers believe that the Yuan remains extremely undervalued. The IMF estimates that the USD/CNY exchange rate should be close to 3.8 on a PPP basis versus the 6.7 currently.
Continued gains in the Chinese Yuan translate into greater purchasing power for the country’s consumers, all else equal. That bodes well for commodity pricing, and commodity currencies, for instance. Also benefiting are rival exporters such as Japan. That being said, as it relates to the Yen, recent government intervention dwarfs any modest improvement in Japan’s export sector.