China likely to opt for faster rise in yuan
MarketWatch.com-Friday, June 03, 2011
By Chris Oliver, MarketWatch
Last Update: 6:50 AM ET Jun 3, 2011
ReutersThe People's Bank of China.
HONG KONG (MarketWatch) — China is likely preparing its currency for faster appreciation, as it hopes a stronger currency will help cool prices, analysts said.
Analysts said evidence of a shift in China’s attitude toward its currency could be seen in recent reports published in Chinese news publications.
Of particular note were two commentary pieces from last month on the merits of broadening the yuan’s daily trading band — one written by an official with the State Administration of Foreign Exchange and another by a researcher at the Chinese Academy of Social Sciences.
The SAFE official said the band should be broadened to plus or minus 1% from the daily parity rate, up from 0.5% currently. In a separate piece, the CASS researcher elaborated on the benefits of a wider currency band in controlling inflation.
“The recent comments appear to have been sequenced deliberately,” wrote Bank of America-Merrill Lynch’s foreign-exchange strategist Christy Tan in note earlier this week, saying she believes China is close to announcing a loosening of its control over the currency.
Recent history shows that a widening of the trading band tends to coincide with a period of significant appreciation in the value of the Chinese yuan.
During the previous revamp in May 2007, when the trading band was widened by 20 basis points, the annualized rate of appreciation of the yuan accelerated to 12% from 7.2%, according to Merrill Lynch data.
If, as the commentaries suggest, the band were widened to 1%, it could signal “more aggressive” rates of annualized appreciation ahead, Tan said.
Under it modern currency regime, Beijing permits the yuan to fluctuate 0.5% from its central parity, which is set by the central bank daily ahead of the market trading.
In practice, the yuan remains closely tethered to the daily parity rate, with moves encroaching on the 0.5% limit rare, according to Merrill data, which tracked the yuan’s movement against the U.S. dollar over the previous eight months.
Broadening the band can boost expectations of two-way movement in the currency, creating uncertainty in the short-term direction of the currency, something that can help in curbing speculation.
Inflation war
China appears to be facing inflationary dynamics much like those seen in the period that preceded its previous round of changes in the management of the currency.
In the first six months of 2007, which overlapped with Beijing’s currency system overhaul in May, China’s foreign-exchange reserves grew by $266.3 billion, or more than the $244.7 billion for all of 2006.
In the first quarter of this year, China’s forex reserves surged $200 billion, bringing its massive stockpile to $3 trillion, a rise of 23% in 16 months.
Following the first-quarter data, People’s Bank of China Gov. Zhou Xiaochuan cautioned of “excessively rapid accumulation.”
Among concerns are the huge size of the PBOC’s balance sheet, which totals 27 trillion yuan ($4.17 trillion), or about 50% larger than assets held on the balance of the Federal Reserve, according to figures by Societe Generale.
Owing to its closed capital account, China has little option but to offset capital inflows by printing yuan. If the forex reserves continue to grow at current rates, SocGen estimates the PBOC could be forced to print CNY1.8 trillion each quarter, or as much as CNY7.2 trillion annually.
SocGen said China sees it has few options apart from currency appreciation to cool excessive growth in its money supply.
In fact, inflation was also a major concern among Chinese policy makers in 2007, as the consumer price index accelerated sharply during the first six months, eventually hitting 4.4% in June.
Figures due to be released later this month are expected to show the CPI in May rose to 5.4%, picking up from 5.3% in April, according to analyst estimates cited in the China Securities Journal earlier this week.
Using quantitative tightening — such as hikes to the ratio of funds banks must set aside as reserves — proved helpful in soaking up excessive funds within the financial system, but now appears to be losing its punch in containing prices.
SocGen estimates China’s banking system will begin to break down if the required reserve ratio rises above 23%. Most major banks must set aside 21% of deposits currently.
“We think the signals for a major change in the yuan regime seem to have turned to yellow from red,” said the SocGen analysts.
Raising interest rates to help cool down the economy doesn’t seem to be much help either, as Chinese companies are increasingly tapping Hong Kong as a source for cheap financing, SocGen said.
SocGen said China will likely opt for a one-off 5% revaluation in the fourth quarter, coupled with a widened trading band.
In its revised outlook, SocGen said it now expects the U.S. dollar will ease to CNY5.85 by June 2012, compared to its previous forecast of CNY6.05. One dollar currently buys CNY6.48.
Merrill analyst Tan said that the need for reform was evident last year, but that China likely delayed action because of uncertainties over the European sovereign-debt crisis.
MarketWatch.com-Friday, June 03, 2011
By Chris Oliver, MarketWatch
Last Update: 6:50 AM ET Jun 3, 2011
ReutersThe People's Bank of China.
HONG KONG (MarketWatch) — China is likely preparing its currency for faster appreciation, as it hopes a stronger currency will help cool prices, analysts said.
Analysts said evidence of a shift in China’s attitude toward its currency could be seen in recent reports published in Chinese news publications.
Of particular note were two commentary pieces from last month on the merits of broadening the yuan’s daily trading band — one written by an official with the State Administration of Foreign Exchange and another by a researcher at the Chinese Academy of Social Sciences.
The SAFE official said the band should be broadened to plus or minus 1% from the daily parity rate, up from 0.5% currently. In a separate piece, the CASS researcher elaborated on the benefits of a wider currency band in controlling inflation.
“The recent comments appear to have been sequenced deliberately,” wrote Bank of America-Merrill Lynch’s foreign-exchange strategist Christy Tan in note earlier this week, saying she believes China is close to announcing a loosening of its control over the currency.
Recent history shows that a widening of the trading band tends to coincide with a period of significant appreciation in the value of the Chinese yuan.
During the previous revamp in May 2007, when the trading band was widened by 20 basis points, the annualized rate of appreciation of the yuan accelerated to 12% from 7.2%, according to Merrill Lynch data.
If, as the commentaries suggest, the band were widened to 1%, it could signal “more aggressive” rates of annualized appreciation ahead, Tan said.
Under it modern currency regime, Beijing permits the yuan to fluctuate 0.5% from its central parity, which is set by the central bank daily ahead of the market trading.
In practice, the yuan remains closely tethered to the daily parity rate, with moves encroaching on the 0.5% limit rare, according to Merrill data, which tracked the yuan’s movement against the U.S. dollar over the previous eight months.
Broadening the band can boost expectations of two-way movement in the currency, creating uncertainty in the short-term direction of the currency, something that can help in curbing speculation.
Inflation war
China appears to be facing inflationary dynamics much like those seen in the period that preceded its previous round of changes in the management of the currency.
In the first six months of 2007, which overlapped with Beijing’s currency system overhaul in May, China’s foreign-exchange reserves grew by $266.3 billion, or more than the $244.7 billion for all of 2006.
In the first quarter of this year, China’s forex reserves surged $200 billion, bringing its massive stockpile to $3 trillion, a rise of 23% in 16 months.
Following the first-quarter data, People’s Bank of China Gov. Zhou Xiaochuan cautioned of “excessively rapid accumulation.”
Among concerns are the huge size of the PBOC’s balance sheet, which totals 27 trillion yuan ($4.17 trillion), or about 50% larger than assets held on the balance of the Federal Reserve, according to figures by Societe Generale.
Owing to its closed capital account, China has little option but to offset capital inflows by printing yuan. If the forex reserves continue to grow at current rates, SocGen estimates the PBOC could be forced to print CNY1.8 trillion each quarter, or as much as CNY7.2 trillion annually.
SocGen said China sees it has few options apart from currency appreciation to cool excessive growth in its money supply.
In fact, inflation was also a major concern among Chinese policy makers in 2007, as the consumer price index accelerated sharply during the first six months, eventually hitting 4.4% in June.
Figures due to be released later this month are expected to show the CPI in May rose to 5.4%, picking up from 5.3% in April, according to analyst estimates cited in the China Securities Journal earlier this week.
Using quantitative tightening — such as hikes to the ratio of funds banks must set aside as reserves — proved helpful in soaking up excessive funds within the financial system, but now appears to be losing its punch in containing prices.
SocGen estimates China’s banking system will begin to break down if the required reserve ratio rises above 23%. Most major banks must set aside 21% of deposits currently.
“We think the signals for a major change in the yuan regime seem to have turned to yellow from red,” said the SocGen analysts.
Raising interest rates to help cool down the economy doesn’t seem to be much help either, as Chinese companies are increasingly tapping Hong Kong as a source for cheap financing, SocGen said.
SocGen said China will likely opt for a one-off 5% revaluation in the fourth quarter, coupled with a widened trading band.
In its revised outlook, SocGen said it now expects the U.S. dollar will ease to CNY5.85 by June 2012, compared to its previous forecast of CNY6.05. One dollar currently buys CNY6.48.
Merrill analyst Tan said that the need for reform was evident last year, but that China likely delayed action because of uncertainties over the European sovereign-debt crisis.