Analysts: Chinese Exports Up 17.7%; Prompt Renewed Yuan Talk
Monday, January 11, 2010 - 15:14
NEW YORK (MNI) - Just-released Chinese trade data, showing a return to positive export growth in December for the first time in 14 months, combined with other solid Chinese data has prompted renewed talk that the People's Bank of China might allow the yuan to strengthen again.
Analysts were mixed in their views of what actions, if any, the PBOC might take in response to further prove of recovery, with one camp looking for a gradual appreciation of the yuan and other seeing scope for another one-off revaluation.
There is yet another camp that looks for the PBOC to do nothing in the foreseeable future.
Trade data released overnight by the General Administration of Customs showed that China's exports rose 17.7% to $130.72 billion.
In addition, the Customs office said imports rose by a record 55.9% year-on-year to $112.29 billion, with the monthly surplus declining to $18.43 billion from $19.09 billion in November.
The December results were partly underpinned by a base-effect stemming from the collapse of trade at the end of 2008.
Full-year data, reflecting the breadth of the global financial crisis, showed China with a trade surplus of $196.06 billion in 2009, down from 2008's record $295.46 billion surplus.
Nevertheless, the positive export growth seen in December, when take with other recently released data, only adds to China's recovery prospects.
The HSBC Manufacturing Purchasing Managers Index (PMI), released earlier in January, showed that conditions in China's manufacturing sector continued to improve in December.
The headline index rose to 56.1 in December, the highest level in its near-six year history and up from 55.7 in November.
In addition, China's semi-official purchasing managers index jumped to 56.6 in December from 55.2 of November, thanks to strong growth in output and rising new orders, according to data released January 1 by the China Federation of Logistics and Purchasing (CFLP).
The December's result marks the tenth straight month above the 50 boom or bust line separating expansion from contraction.
Given these robust Chinese data results, it would not be a stretch to believe that the yuan exchange rate will be key part of any currency discussion when G-7 finance ministers meet February 5-6 in Iqaluit, Nunavut, Canada.
"As China leads the global economy out of recession, it is facing increasing pressure to revalue the yuan," said Benjamin Reitzes, economist at BMO Capital Markets, in a research note.
During the crisis, China could argue that what was essentially a yuan-dollar peg was needed to keep Chinese exporters competitive.
"However, after last year's deep dive in the U.S. dollar, a continued peg is providing Chinese firms with an increasingly large advantage over foreign competitors with a floating currency," he said.
In addition to growing calls for renewed yuan strength from the U.S. and the eurozone, emerging market central banks are also voicing concern.
"Competitors like Brazil and Indonesia have seen their currencies return close to pre-crisis levels versus the dollar, meaning any further appreciation would put them at a disadvantage to China relative to where they were in mid-2008," Reitzes said.
If emerging market currencies continue to strengthen, while the yuan holds steady versus the dollar, "the volume of their complaints could increase sharply, he said.
Nevertheless, senior Chinese government leaders have repeatedly stated that they have no intention of abandoning their 18-month old currency stability policy.
Indeed, Premier Wen Jiabao has accused foreign governments of using pressure on the yuan and protectionism as a strategy to contain Chinese development.
"Despite the rhetoric, with pressure on China likely to broaden and grow, we expect some action on the currency, perhaps as soon as this quarter," said BMO Capital Market's Reitzes.
"In fact, when China does finally act, don't be surprised by a large one-time revaluation (also suggested by a government-supported think tank in China) before the currency is allowed to strengthen consistently on a managed basis," he added.
Reitzes referred to a proposal published in an essay mid-December by Chinese Academy of Social Sciences economist Zhang Bin.
Zhang maintained that a 10% on-off revaluation would end one way bets on the yuan, reduce speculative capital inflows, cut the trade surplus and reduce international tension over China's FX policy.
He also proposed that the yuan's daily trading range be widened to 3% around the central parity from the current 1.5% range.
Monday's upbeat trade data had analysts discussing the prospects of renewed yuan strength.
With Chinese exports having retraced 90% of their peak-to-trough fall and imports at an all-time high in December, the shifting trade picture, "at the margin" also "increases the probability of the PBOC allowing dollar-yuan downside," said Credit Suisse strategists.
"Nevertheless, we still think that a gradual CNY appreciation is more likely than a one-off currency revaluation as policy-makers still remain very weary of any loss of export competitiveness," they said.
Credit Suisse has a CNY 1000.00 target rate for dollar-yuan on a twelve-month basis.
Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, NY, maintained that the Chinese yuan peg with the dollar makes it difficult for the People's Bank of China to normalize monetary policy.
"China can not tighten monetary conditions if capital can flow freely into the country and the exchange rate is fixed," he said.
More specifically, "China can not have an independent monetary policy from the Fed if it fixes its exchange rate against the dollar - effective tightening will have to await Mr. Bernanke's first move," Weinberg said.
As capital inflows again lead to increased Chinese foreign currency reserves, there be renewed calls for the yuan to "float against the dollar. Calls that will be ignored," he said.
The PBOC fixed the dollar-yuan central parity rate at CNY6.8275 Monday, compared to CNY6.8279 Friday.
The yuan fell 0.06% in 2009 as the government continued to hold the Chinese unit virtually pegged to the U.S. dollar, despite growing international criticism about its exchange rate policy.
Last year marked the first that the yuan has fallen against the dollar since being depegged in 2005. 2009's paltry move against the dollar compares with last year's 7.05% rise and with the 6.86% jump seen in 2007.
Monday's fixing brings the yuan's gains versus the greenback to 21.22% since currency reforms were announced.
Monday, January 11, 2010 - 15:14
NEW YORK (MNI) - Just-released Chinese trade data, showing a return to positive export growth in December for the first time in 14 months, combined with other solid Chinese data has prompted renewed talk that the People's Bank of China might allow the yuan to strengthen again.
Analysts were mixed in their views of what actions, if any, the PBOC might take in response to further prove of recovery, with one camp looking for a gradual appreciation of the yuan and other seeing scope for another one-off revaluation.
There is yet another camp that looks for the PBOC to do nothing in the foreseeable future.
Trade data released overnight by the General Administration of Customs showed that China's exports rose 17.7% to $130.72 billion.
In addition, the Customs office said imports rose by a record 55.9% year-on-year to $112.29 billion, with the monthly surplus declining to $18.43 billion from $19.09 billion in November.
The December results were partly underpinned by a base-effect stemming from the collapse of trade at the end of 2008.
Full-year data, reflecting the breadth of the global financial crisis, showed China with a trade surplus of $196.06 billion in 2009, down from 2008's record $295.46 billion surplus.
Nevertheless, the positive export growth seen in December, when take with other recently released data, only adds to China's recovery prospects.
The HSBC Manufacturing Purchasing Managers Index (PMI), released earlier in January, showed that conditions in China's manufacturing sector continued to improve in December.
The headline index rose to 56.1 in December, the highest level in its near-six year history and up from 55.7 in November.
In addition, China's semi-official purchasing managers index jumped to 56.6 in December from 55.2 of November, thanks to strong growth in output and rising new orders, according to data released January 1 by the China Federation of Logistics and Purchasing (CFLP).
The December's result marks the tenth straight month above the 50 boom or bust line separating expansion from contraction.
Given these robust Chinese data results, it would not be a stretch to believe that the yuan exchange rate will be key part of any currency discussion when G-7 finance ministers meet February 5-6 in Iqaluit, Nunavut, Canada.
"As China leads the global economy out of recession, it is facing increasing pressure to revalue the yuan," said Benjamin Reitzes, economist at BMO Capital Markets, in a research note.
During the crisis, China could argue that what was essentially a yuan-dollar peg was needed to keep Chinese exporters competitive.
"However, after last year's deep dive in the U.S. dollar, a continued peg is providing Chinese firms with an increasingly large advantage over foreign competitors with a floating currency," he said.
In addition to growing calls for renewed yuan strength from the U.S. and the eurozone, emerging market central banks are also voicing concern.
"Competitors like Brazil and Indonesia have seen their currencies return close to pre-crisis levels versus the dollar, meaning any further appreciation would put them at a disadvantage to China relative to where they were in mid-2008," Reitzes said.
If emerging market currencies continue to strengthen, while the yuan holds steady versus the dollar, "the volume of their complaints could increase sharply, he said.
Nevertheless, senior Chinese government leaders have repeatedly stated that they have no intention of abandoning their 18-month old currency stability policy.
Indeed, Premier Wen Jiabao has accused foreign governments of using pressure on the yuan and protectionism as a strategy to contain Chinese development.
"Despite the rhetoric, with pressure on China likely to broaden and grow, we expect some action on the currency, perhaps as soon as this quarter," said BMO Capital Market's Reitzes.
"In fact, when China does finally act, don't be surprised by a large one-time revaluation (also suggested by a government-supported think tank in China) before the currency is allowed to strengthen consistently on a managed basis," he added.
Reitzes referred to a proposal published in an essay mid-December by Chinese Academy of Social Sciences economist Zhang Bin.
Zhang maintained that a 10% on-off revaluation would end one way bets on the yuan, reduce speculative capital inflows, cut the trade surplus and reduce international tension over China's FX policy.
He also proposed that the yuan's daily trading range be widened to 3% around the central parity from the current 1.5% range.
Monday's upbeat trade data had analysts discussing the prospects of renewed yuan strength.
With Chinese exports having retraced 90% of their peak-to-trough fall and imports at an all-time high in December, the shifting trade picture, "at the margin" also "increases the probability of the PBOC allowing dollar-yuan downside," said Credit Suisse strategists.
"Nevertheless, we still think that a gradual CNY appreciation is more likely than a one-off currency revaluation as policy-makers still remain very weary of any loss of export competitiveness," they said.
Credit Suisse has a CNY 1000.00 target rate for dollar-yuan on a twelve-month basis.
Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, NY, maintained that the Chinese yuan peg with the dollar makes it difficult for the People's Bank of China to normalize monetary policy.
"China can not tighten monetary conditions if capital can flow freely into the country and the exchange rate is fixed," he said.
More specifically, "China can not have an independent monetary policy from the Fed if it fixes its exchange rate against the dollar - effective tightening will have to await Mr. Bernanke's first move," Weinberg said.
As capital inflows again lead to increased Chinese foreign currency reserves, there be renewed calls for the yuan to "float against the dollar. Calls that will be ignored," he said.
The PBOC fixed the dollar-yuan central parity rate at CNY6.8275 Monday, compared to CNY6.8279 Friday.
The yuan fell 0.06% in 2009 as the government continued to hold the Chinese unit virtually pegged to the U.S. dollar, despite growing international criticism about its exchange rate policy.
Last year marked the first that the yuan has fallen against the dollar since being depegged in 2005. 2009's paltry move against the dollar compares with last year's 7.05% rise and with the 6.86% jump seen in 2007.
Monday's fixing brings the yuan's gains versus the greenback to 21.22% since currency reforms were announced.