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14-08-2015, 07:29 AM
China’s central bank eases fears on yuan devaluation
THE AUSTRALIAN AUGUST 14, 2015 12:00AM
David Rogers
Markets Editor
Sydney
China attempted to restore calm to global financial markets yesterday, saying its currency devaluation was “basically already completed” and it would only step in when the market is “distorted”.
The People’s Bank of China also lowered its official yuan rate a further 1.1 per cent against the US dollar — bringing its cumulative decline this week to 4.5 per cent.
An abrupt shift of foreign exchange policy towards a market-based system, combined with China’s biggest devaluation in 21 years, has triggered sharp falls in regional currencies and equities this week amid concern about a potential loss of competitiveness.
Australian financial markets reacted cautiously. The local stockmarket was unable to sustain much of a recovery after hitting a seven-month low this week after the yuan devaluation.
The Australian dollar was trading around US73.5c late yesterday after hitting a six-year low.
At a news conference in Beijing yesterday, Chinese central bank officials offered a rare public defence of their policy, saying the yuan would stabilise and eventually resume its climb.
PBOC vice-governor Yi Gang said China had the financial power to defend the currency as needed.
China’s previous policy of holding the yuan broadly stable against the US dollar contributed to a $US315 billion ($443bn) reduction in its foreign reserves and lower exports in the past year.
But officials also said the yuan’s underpinning remained firm and that its value should strengthen. They dismissed the idea that the move was made to help the country’s sputtering exports sector.
“In the long run, the renminbi (yuan) remains a strong currency,” said PBOC assistant governor Zhang Xiaohui.
They also said the move — made through a mechanism intended to give markets more say in how the yuan was valued — gave the central bank more room to manoeuvre at a time when the US dollar was appreciating against most other currencies.
“A fixed exchange rate looks stable, but it hides accumulated problems,” Mr Yi said. The news conference was an unusual event for an organisation that rarely puts a public face forward and typically communicates through lengthy messages on its website. Foreign reporters as well as state-controlled media were invited.
It also marked a rare public stepping out for Mr Yi, the PBOC’s No 2 official and the one responsible for day-to-day oversight of foreign exchange.
Mr Yi described as “nonsense” a report that the PBOC wanted to engineer an eventual 10 per cent depreciation of the currency in an effort to help exporters, which play a vital role in the economy but have been suffering from sluggish global demand as well as a stronger currency.
He also said China would continue its own schedule to open up the country to freer cross-border capital flows despite recent market fluctuations.
The Wall Street Journal reported on Wednesday that the PBOC intervened in the foreign-exchange market late that day to defend the currency. Asked about that move, Mr Yi said the PBOC had stopped “regularly” intervening in the market to control the yuan’s value, but the central bank had adopted a “managed floating-rate regime” and would intervene during “external shocks”.
Investors said greater market influence presaged more volatility to come.
“It’s going to be a period of volatility for the next few months before (the yuan) finds its equilibrium level,” said Alexandra Edstein, senior portfolio manager at London-based hedge fund The Cambridge Strategy.
“The trend will be depreciation.”
Nikko Securities senior fixed income portfolio manager Chia Woon Khien said the yuan’s weakness was likely to persist for a few months, at least until after the US Federal Reserve’s first interest rate hike, which most economists expect to occur at its next meeting on September 16-17.
But she didn’t expect the currency to devalue more than 10 per cent versus the US dollar.
“Thereafter, the currency will likely be on a long-term appreciation path,” she said.
The PBOC also said it had acted because the Chinese currency was rising while market forces said it should fall.
The move towards more flexibility at a time when market pressures were set to push the yuan down left Washington and other trading partners that have criticised Beijing’s currency controls off-balance. They have urged China for years to switch to a market-based system but assumed that would cause the yuan to rise and help their own exporters.
That leaves the US government in an “awkward and difficult” position, said Eswar Prasad, a professor of trade policy at Cornell University. “A falling yuan and a rising bilateral US trade deficit with China will sharpen congressional criticism of China’s currency policies,” he said.
“But the administration has no economic basis for criticising China’s move,” said Mr Prasad. “Indeed, preventing the yuan from depreciating further would run counter to US and IMF calls for a more market-determined exchange rate.”
additional reporting: dow jones newswires, AP
THE AUSTRALIAN AUGUST 14, 2015 12:00AM
David Rogers
Markets Editor
Sydney
China attempted to restore calm to global financial markets yesterday, saying its currency devaluation was “basically already completed” and it would only step in when the market is “distorted”.
The People’s Bank of China also lowered its official yuan rate a further 1.1 per cent against the US dollar — bringing its cumulative decline this week to 4.5 per cent.
An abrupt shift of foreign exchange policy towards a market-based system, combined with China’s biggest devaluation in 21 years, has triggered sharp falls in regional currencies and equities this week amid concern about a potential loss of competitiveness.
Australian financial markets reacted cautiously. The local stockmarket was unable to sustain much of a recovery after hitting a seven-month low this week after the yuan devaluation.
The Australian dollar was trading around US73.5c late yesterday after hitting a six-year low.
At a news conference in Beijing yesterday, Chinese central bank officials offered a rare public defence of their policy, saying the yuan would stabilise and eventually resume its climb.
PBOC vice-governor Yi Gang said China had the financial power to defend the currency as needed.
China’s previous policy of holding the yuan broadly stable against the US dollar contributed to a $US315 billion ($443bn) reduction in its foreign reserves and lower exports in the past year.
But officials also said the yuan’s underpinning remained firm and that its value should strengthen. They dismissed the idea that the move was made to help the country’s sputtering exports sector.
“In the long run, the renminbi (yuan) remains a strong currency,” said PBOC assistant governor Zhang Xiaohui.
They also said the move — made through a mechanism intended to give markets more say in how the yuan was valued — gave the central bank more room to manoeuvre at a time when the US dollar was appreciating against most other currencies.
“A fixed exchange rate looks stable, but it hides accumulated problems,” Mr Yi said. The news conference was an unusual event for an organisation that rarely puts a public face forward and typically communicates through lengthy messages on its website. Foreign reporters as well as state-controlled media were invited.
It also marked a rare public stepping out for Mr Yi, the PBOC’s No 2 official and the one responsible for day-to-day oversight of foreign exchange.
Mr Yi described as “nonsense” a report that the PBOC wanted to engineer an eventual 10 per cent depreciation of the currency in an effort to help exporters, which play a vital role in the economy but have been suffering from sluggish global demand as well as a stronger currency.
He also said China would continue its own schedule to open up the country to freer cross-border capital flows despite recent market fluctuations.
The Wall Street Journal reported on Wednesday that the PBOC intervened in the foreign-exchange market late that day to defend the currency. Asked about that move, Mr Yi said the PBOC had stopped “regularly” intervening in the market to control the yuan’s value, but the central bank had adopted a “managed floating-rate regime” and would intervene during “external shocks”.
Investors said greater market influence presaged more volatility to come.
“It’s going to be a period of volatility for the next few months before (the yuan) finds its equilibrium level,” said Alexandra Edstein, senior portfolio manager at London-based hedge fund The Cambridge Strategy.
“The trend will be depreciation.”
Nikko Securities senior fixed income portfolio manager Chia Woon Khien said the yuan’s weakness was likely to persist for a few months, at least until after the US Federal Reserve’s first interest rate hike, which most economists expect to occur at its next meeting on September 16-17.
But she didn’t expect the currency to devalue more than 10 per cent versus the US dollar.
“Thereafter, the currency will likely be on a long-term appreciation path,” she said.
The PBOC also said it had acted because the Chinese currency was rising while market forces said it should fall.
The move towards more flexibility at a time when market pressures were set to push the yuan down left Washington and other trading partners that have criticised Beijing’s currency controls off-balance. They have urged China for years to switch to a market-based system but assumed that would cause the yuan to rise and help their own exporters.
That leaves the US government in an “awkward and difficult” position, said Eswar Prasad, a professor of trade policy at Cornell University. “A falling yuan and a rising bilateral US trade deficit with China will sharpen congressional criticism of China’s currency policies,” he said.
“But the administration has no economic basis for criticising China’s move,” said Mr Prasad. “Indeed, preventing the yuan from depreciating further would run counter to US and IMF calls for a more market-determined exchange rate.”
additional reporting: dow jones newswires, AP
