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09-12-2015, 11:32 PM
Its the strength of US$ stupid... RMB is relatively stable against S$ and hence China could well be having a mgt float system similar to MAS' exchange rate policy
China Sets Yuan at Four-Year Low in ‘Stress Test’
The central bank wants to see to what extent it can let market forces determine currency’s value
[Image: BN-LP934_1209YU_J_20151209000312.jpg]ENLARGE
A stack of 100-yuan notes at a bank in Anhui province; economists and investors say Beijing may not be able to resist the mounting depreciation pressure on its currency. PHOTO: ZUMA PRESS
By
ANJANI TRIVEDI in Hong Kong and
LINGLING WEI in Shanghai
Updated Dec. 9, 2015 3:57 a.m. ET
4 COMMENTS
China guided the yuan to its weakest level in more than four years as the country deals with currency outflows and a slowing economy while trying to loosen its grip on the exchange rate.
The central bank is testing how far it can let market forces go in determining the yuan’s value without setting off a sharp selloff and incurring wrath from trading partners, according to people familiar with the matter.
“It’s a stress test of sorts,” one of the people said. “What the central bank is trying to avoid is the kind of panic selling that resulted from the August devaluation.”
China set the yuan at 6.414 to the U.S. dollar Wednesday, its weakest level since August 2011, continuing a month-long trend and following the market’s lead. In the past, the setting didn’t always coincide with where the yuan had last traded in the market, as the central bank tightened its grip to stabilize the currency.
Beijing is also bowing to investor pressure to deliver on its pledge of a more market-driven yuan, while trying to avoid a repeat of mistakes like its market-roiling summer devaluation. The heavy selloff caught People’s Bank of China officials somewhat off guard, according to people close to the central bank.
The yuan has lost as much as 3.4% of its value since Aug. 10, the eve of the 2% devaluation.
Efforts since then to steady the yuan have been costly. Internal estimates at the PBOC show that it spent as much as $130 billion in August alone in bolstering the yuan’s value. And in recent months, Beijing has tested various ways to intervene to provide traders with forward guidance.
Rounds of monetary easing, deteriorating foreign-exchange reserves and a market convinced that China’s currency has only one way to go have left Beijing in a bind. On one hand, it has vowed to global investors and the International Monetary Fund that it will act to make its currency more market-driven. On the other, billions of dollars continue to flow out and competing domestic pressures are rising.
“The central bank is in a dilemma right now,” said Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
Mr. Zhang and other analysts now think the yuan is overvalued relative to its purchasing power, forcing Chinese companies to cut prices and lower wages to stay competitive, which could raise the specter of deflation.
“At the same time, the central bank should attach high importance to the risks associated with depreciation, such as Chinese companies’ abilities to repay dollar-denominated debts and its potential impact on currencies of China’s trading partners in Southeast Asia,” he said.
Investors and traders have since expected the yuan to weaken as Beijing works to boost an economy hurt by a relatively strong currency.
“What has happened in the past few days shows a clear intention from the authorities that they would like to see an orderly and mild depreciation of the yuan,” said the head of trading at a Guangzhou-based, state-run bank. “Everything, ranging from the dismal trade data to the prospect of a Fed rate increase, calls for a weaker yuan. If you ask 10 traders in China, nine will tell you that they expect the currency to depreciate in the near term.”
Data earlier this week showed China’s foreign-exchange reserves fell in November to their lowest level in more than two years, dropping $87.22 billion to $3.44 trillion.
Economists and investors say Beijing may not be able to resist the mounting depreciation pressure on its currency, given the capital outflows.
Stephen Jen, founder of SLJ Macro Partners LLP, a London-based hedge fund, says China’s pent-up demand for foreign assets “must be satiated sooner or later.”
As China evolves “from the world’s largest exporter of goods to a large exporter of capital,” it seems the yuan should continue to depreciate, he says.
“We could debate on the timing and the pace of this trend, but the direction of the trend seems to be clear,” he wrote in a note to clients Tuesday. Like other emerging-market currencies facing pressures from a strengthening U.S. dollar and the prospect of rising U.S. interest rates, he added, China’s yuan should depreciate “due to capital account reasons, not current account reasons.”
Beijing has few options: Continue to lean on its foreign-exchange reserves, let the currency fall in an orderly manner or let the currency fall freely and lose enough value to absorb the rising economic pressures.
Last week, the International Monetary Fund said it would include the yuan in its elite basket of reserve currencies, the Special Drawing Rights, along with the U.S. dollar, the euro, the pound and the yen. While some critics worry that Beijing now has free rein to lets its currency fall to make its monetary policy more effective, China has vowed to communicate better with financial markets.
The IMF action is merely symbolic at this point—the yuan won’t be added to the emergency lender’s basket until October 2016.
China also faces external pressure not to devalue the yuan too sharply. A big depreciation would hurt Beijing’s credibility at a time when the leadership wants to attract more foreign capital. Also, China hosts the Group of 20 major economies next year. A cheaper yuan could renew U.S. election-year criticism that China is keeping its currency artificially low to help its exporters.
At a press briefing after the IMF’s inclusion announcement, PBOC Vice Governor Yi Gangsaid Beijing will continue to keep its currency “stable at a reasonable and equilibrium level,” intervening only to smooth excessive volatility.
The weak setting Wednesday didn’t trigger any sharp selling in the yuan traded onshore, which fell as much as 0.14%. The yuan traded offshore, which has lost 0.6% of its value over the past three days, was last down 0.04%.
China’s yuan closed trading onshore at 6.4280 to the dollar, its weakest closing level since August 2011.
—Shen Hong in Shanghai contributed to this article
Write to Anjani Trivedi at anjani.trivedi@wsj.com and Lingling Wei atlingling.wei@wsj.com
China Sets Yuan at Four-Year Low in ‘Stress Test’
The central bank wants to see to what extent it can let market forces determine currency’s value
[Image: BN-LP934_1209YU_J_20151209000312.jpg]ENLARGE
A stack of 100-yuan notes at a bank in Anhui province; economists and investors say Beijing may not be able to resist the mounting depreciation pressure on its currency. PHOTO: ZUMA PRESS
By
ANJANI TRIVEDI in Hong Kong and
LINGLING WEI in Shanghai
Updated Dec. 9, 2015 3:57 a.m. ET
4 COMMENTS
China guided the yuan to its weakest level in more than four years as the country deals with currency outflows and a slowing economy while trying to loosen its grip on the exchange rate.
The central bank is testing how far it can let market forces go in determining the yuan’s value without setting off a sharp selloff and incurring wrath from trading partners, according to people familiar with the matter.
“It’s a stress test of sorts,” one of the people said. “What the central bank is trying to avoid is the kind of panic selling that resulted from the August devaluation.”
China set the yuan at 6.414 to the U.S. dollar Wednesday, its weakest level since August 2011, continuing a month-long trend and following the market’s lead. In the past, the setting didn’t always coincide with where the yuan had last traded in the market, as the central bank tightened its grip to stabilize the currency.
Beijing is also bowing to investor pressure to deliver on its pledge of a more market-driven yuan, while trying to avoid a repeat of mistakes like its market-roiling summer devaluation. The heavy selloff caught People’s Bank of China officials somewhat off guard, according to people close to the central bank.
The yuan has lost as much as 3.4% of its value since Aug. 10, the eve of the 2% devaluation.
Efforts since then to steady the yuan have been costly. Internal estimates at the PBOC show that it spent as much as $130 billion in August alone in bolstering the yuan’s value. And in recent months, Beijing has tested various ways to intervene to provide traders with forward guidance.
Rounds of monetary easing, deteriorating foreign-exchange reserves and a market convinced that China’s currency has only one way to go have left Beijing in a bind. On one hand, it has vowed to global investors and the International Monetary Fund that it will act to make its currency more market-driven. On the other, billions of dollars continue to flow out and competing domestic pressures are rising.
“The central bank is in a dilemma right now,” said Zhang Ming, a senior economist at the Chinese Academy of Social Sciences, a government think tank.
Mr. Zhang and other analysts now think the yuan is overvalued relative to its purchasing power, forcing Chinese companies to cut prices and lower wages to stay competitive, which could raise the specter of deflation.
“At the same time, the central bank should attach high importance to the risks associated with depreciation, such as Chinese companies’ abilities to repay dollar-denominated debts and its potential impact on currencies of China’s trading partners in Southeast Asia,” he said.
Investors and traders have since expected the yuan to weaken as Beijing works to boost an economy hurt by a relatively strong currency.
“What has happened in the past few days shows a clear intention from the authorities that they would like to see an orderly and mild depreciation of the yuan,” said the head of trading at a Guangzhou-based, state-run bank. “Everything, ranging from the dismal trade data to the prospect of a Fed rate increase, calls for a weaker yuan. If you ask 10 traders in China, nine will tell you that they expect the currency to depreciate in the near term.”
Data earlier this week showed China’s foreign-exchange reserves fell in November to their lowest level in more than two years, dropping $87.22 billion to $3.44 trillion.
Economists and investors say Beijing may not be able to resist the mounting depreciation pressure on its currency, given the capital outflows.
Stephen Jen, founder of SLJ Macro Partners LLP, a London-based hedge fund, says China’s pent-up demand for foreign assets “must be satiated sooner or later.”
As China evolves “from the world’s largest exporter of goods to a large exporter of capital,” it seems the yuan should continue to depreciate, he says.
“We could debate on the timing and the pace of this trend, but the direction of the trend seems to be clear,” he wrote in a note to clients Tuesday. Like other emerging-market currencies facing pressures from a strengthening U.S. dollar and the prospect of rising U.S. interest rates, he added, China’s yuan should depreciate “due to capital account reasons, not current account reasons.”
Beijing has few options: Continue to lean on its foreign-exchange reserves, let the currency fall in an orderly manner or let the currency fall freely and lose enough value to absorb the rising economic pressures.
Last week, the International Monetary Fund said it would include the yuan in its elite basket of reserve currencies, the Special Drawing Rights, along with the U.S. dollar, the euro, the pound and the yen. While some critics worry that Beijing now has free rein to lets its currency fall to make its monetary policy more effective, China has vowed to communicate better with financial markets.
The IMF action is merely symbolic at this point—the yuan won’t be added to the emergency lender’s basket until October 2016.
China also faces external pressure not to devalue the yuan too sharply. A big depreciation would hurt Beijing’s credibility at a time when the leadership wants to attract more foreign capital. Also, China hosts the Group of 20 major economies next year. A cheaper yuan could renew U.S. election-year criticism that China is keeping its currency artificially low to help its exporters.
At a press briefing after the IMF’s inclusion announcement, PBOC Vice Governor Yi Gangsaid Beijing will continue to keep its currency “stable at a reasonable and equilibrium level,” intervening only to smooth excessive volatility.
The weak setting Wednesday didn’t trigger any sharp selling in the yuan traded onshore, which fell as much as 0.14%. The yuan traded offshore, which has lost 0.6% of its value over the past three days, was last down 0.04%.
China’s yuan closed trading onshore at 6.4280 to the dollar, its weakest closing level since August 2011.
—Shen Hong in Shanghai contributed to this article
Write to Anjani Trivedi at anjani.trivedi@wsj.com and Lingling Wei atlingling.wei@wsj.com
