China Money: Beijing awaits catalyst to let yuan appreciate
Thursday October 15, 2009 02:32:10 PM GMT
CHINA-MARKETS/DEBT
* Beijing seeking catalyst to end stable yuan stance
* Commodity-fed inflation could be key trigger for yuan rise
* Heavy speculative capital inflows could also boost yuan
* Renewed long-term yuan rise next year shouldn't surprise
By Lu Jianxin and Edmund Klamann
SHANGHAI, Oct 15 (Reuters) - China is just waiting for the right catalyst to allow the yuan to start rising again against the dollar to renew the sort of appreciation seen in the three years to the middle of 2008.
China has in effect re-pegged its currency around 6.83 per dollar since July last year to help protect its vital exports industry but faces increasing pressure diplomatically and commercially to unleash the yuan once again.
The markets are already starting to anticipate the move and believe the authorities are waiting for the right justification to let the yuan resume its rise against a weakening dollar.
The most likely catalyst will be pressure to control imported inflation as world commodity prices are climbing once again. Oil futures are trading at one-year highs and some other commodities, such as copper, are close to levels last seen before the collapse of Lehman Brothers in September 2008.
Other factors could also come into play. Authorites could move to dampen speculative capital inflows betting on future appreciation of an undervalued yuan, fearing the hot money could push asset prices too high and destabilise the economy.
A significant recovery in exports, which are still falling year-on-year, could also provide comfort for Beijing that it can let the yuan loose.
Data this week showed that while exports in September fell from a year earlier, they rose 6.3 percent from August when adjusted for working days. Indeed, a Commerce Ministry spokesman said annual changes would return to growth in the fourth quarter.
"The Chinese government is now commercial-minded enough to weigh the potential economic losses of an undervalued currency," said a senior trader at a major state-owned bank in Beijing.
"All it needs is some justification that would soothe anxieties over yuan appreciation," he said.
China has also shown its willingness to support a rebalancing of the world economy, where global trade now accounts for 60 to 70 percent of its GDP and leaves it vulnerable to international economic turbulence like the crisis of the past year.
FEW QUALMS
After a revaluation in 2005, the yuan rose almost 19 percent against the dollar before the appreciation came to a grinding halt in the middle of July last year.
"China is no exception among world countries in deciding its exchange rate based on its own interests," said economist Zhang Yansheng at the country's top economic planner, the National Development and Reform Commission.
"With its exports still falling sharply, how can it allow the yuan to appreciate right now?"
Western policymakers have criticised Beijing for years by saying it curbs a natural rise in the value of the yuan and they have made repeated calls on it to let the currency rise faster.
The flat level of the yuan and expectations the worst of the global financial crisis is over could force Beijing's hand to allow the currency to rise.
"In another scenario, recent improvements in the world economy may lead to a healing of the global financial system," said Wang Haoyu, economist at First Capital Securities.
The Shenzhen-based Wang argued that this would generate surplus money in the global financial system that would initially target countries with undervalued currencies.
"Another wave of hot money inflows will flood China's markets with liquidity, pushing its asset prices into a huge bubble and threatening the economy's stability and long-term development."
The yuan's lock step with the falling dollar has meant steep depreciation against currencies of most other trading partners.
Since the dollar index has dropped 15 percent against a basket of six major world currencies dominated by the euro in the past seven months, so has the yuan.
Many dealers now suspect the dollar index may slide to a record low, and that is one reason behind a renewed call this month by the Group of Seven for the yuan to rise.
Markets are starting to speculate on a move in the yuan.
Spot yuan traded on the China Foreign Exchange Trade System posted on Monday its highest close on the dollar in more than four months at 6.8234.
Offshore, dollar/yuan one-year non-deliverable forwards are implying the strongest yuan appreciation since August 2008. The forward dipped to a fresh 14-month low of 6.6120 on Thursday, implying yuan appreciation of 3.25 percent from the spot rate.
The spread between the offshore NDFs and one-year onshore forwards widened above 1,100 pips for the first time since June, a level at which banks can comfortably make a 1.5 percent risk-free annual return via arbitrage.
The indicative yield of China's benchmark one-year central bank bill now shows a hefty 56 basis-point premium over the equivalent London Interbank Offered Rate, a sharp contrast with the steep discount seen early this year.
China appears to be leading the recovery of the major global economies and analysts widely expect it will also begin monetary tightening ahead of the United States.
Chinese rate rises will further widen the Sino-U.S. rate spread, inviting speculative funds into China and further adding to pressure for the yuan to appreciate, dealers said.
Thursday October 15, 2009 02:32:10 PM GMT
CHINA-MARKETS/DEBT
* Beijing seeking catalyst to end stable yuan stance
* Commodity-fed inflation could be key trigger for yuan rise
* Heavy speculative capital inflows could also boost yuan
* Renewed long-term yuan rise next year shouldn't surprise
By Lu Jianxin and Edmund Klamann
SHANGHAI, Oct 15 (Reuters) - China is just waiting for the right catalyst to allow the yuan to start rising again against the dollar to renew the sort of appreciation seen in the three years to the middle of 2008.
China has in effect re-pegged its currency around 6.83 per dollar since July last year to help protect its vital exports industry but faces increasing pressure diplomatically and commercially to unleash the yuan once again.
The markets are already starting to anticipate the move and believe the authorities are waiting for the right justification to let the yuan resume its rise against a weakening dollar.
The most likely catalyst will be pressure to control imported inflation as world commodity prices are climbing once again. Oil futures are trading at one-year highs and some other commodities, such as copper, are close to levels last seen before the collapse of Lehman Brothers in September 2008.
Other factors could also come into play. Authorites could move to dampen speculative capital inflows betting on future appreciation of an undervalued yuan, fearing the hot money could push asset prices too high and destabilise the economy.
A significant recovery in exports, which are still falling year-on-year, could also provide comfort for Beijing that it can let the yuan loose.
Data this week showed that while exports in September fell from a year earlier, they rose 6.3 percent from August when adjusted for working days. Indeed, a Commerce Ministry spokesman said annual changes would return to growth in the fourth quarter.
"The Chinese government is now commercial-minded enough to weigh the potential economic losses of an undervalued currency," said a senior trader at a major state-owned bank in Beijing.
"All it needs is some justification that would soothe anxieties over yuan appreciation," he said.
China has also shown its willingness to support a rebalancing of the world economy, where global trade now accounts for 60 to 70 percent of its GDP and leaves it vulnerable to international economic turbulence like the crisis of the past year.
FEW QUALMS
After a revaluation in 2005, the yuan rose almost 19 percent against the dollar before the appreciation came to a grinding halt in the middle of July last year.
"China is no exception among world countries in deciding its exchange rate based on its own interests," said economist Zhang Yansheng at the country's top economic planner, the National Development and Reform Commission.
"With its exports still falling sharply, how can it allow the yuan to appreciate right now?"
Western policymakers have criticised Beijing for years by saying it curbs a natural rise in the value of the yuan and they have made repeated calls on it to let the currency rise faster.
The flat level of the yuan and expectations the worst of the global financial crisis is over could force Beijing's hand to allow the currency to rise.
"In another scenario, recent improvements in the world economy may lead to a healing of the global financial system," said Wang Haoyu, economist at First Capital Securities.
The Shenzhen-based Wang argued that this would generate surplus money in the global financial system that would initially target countries with undervalued currencies.
"Another wave of hot money inflows will flood China's markets with liquidity, pushing its asset prices into a huge bubble and threatening the economy's stability and long-term development."
The yuan's lock step with the falling dollar has meant steep depreciation against currencies of most other trading partners.
Since the dollar index has dropped 15 percent against a basket of six major world currencies dominated by the euro in the past seven months, so has the yuan.
Many dealers now suspect the dollar index may slide to a record low, and that is one reason behind a renewed call this month by the Group of Seven for the yuan to rise.
Markets are starting to speculate on a move in the yuan.
Spot yuan traded on the China Foreign Exchange Trade System posted on Monday its highest close on the dollar in more than four months at 6.8234.
Offshore, dollar/yuan one-year non-deliverable forwards are implying the strongest yuan appreciation since August 2008. The forward dipped to a fresh 14-month low of 6.6120 on Thursday, implying yuan appreciation of 3.25 percent from the spot rate.
The spread between the offshore NDFs and one-year onshore forwards widened above 1,100 pips for the first time since June, a level at which banks can comfortably make a 1.5 percent risk-free annual return via arbitrage.
The indicative yield of China's benchmark one-year central bank bill now shows a hefty 56 basis-point premium over the equivalent London Interbank Offered Rate, a sharp contrast with the steep discount seen early this year.
China appears to be leading the recovery of the major global economies and analysts widely expect it will also begin monetary tightening ahead of the United States.
Chinese rate rises will further widen the Sino-U.S. rate spread, inviting speculative funds into China and further adding to pressure for the yuan to appreciate, dealers said.