Yuan head­ing for ‘ high five’ as trade sur­plus in­creases

China Daily (Hong Kong) - - BUSINESS / DIGEST - By GAO CHANGXIN in Shang­hai gaochangxin@chi­nadaily.com.cn

A gap­ing trade sur­plus pushed the ren­minbi to a new record high at the cen­tral bank fix­ing on Tues­day, and an­a­lysts said that the cur­rency is headed for “five” ter­ri­tory for the first time next year.

The Peo­ple’s Bank of China, the cen­tral bank, set the yuan’s daily ref­er­ence rate 16 ba­sis points higher at 6.1114 per dol­lar, the high­est since China re­vamped its for­eign ex­change regime 20 years ago.

The yuan has ad­vanced 2.6 per­cent against the dol­lar so far this year, mak­ing it the best­per­form­ing Asian cur­rency and ex­tend­ing its gain to 36 per­cent since 2005.

“The cen­tral bank faces a dilemma. It’s al­most sure that the dol­lar-yuan ex­change rate will start with ‘five’ some day in 2014,” said Zhou Hao, an econ­o­mist with Aus­tralia and New Zealand Bank Group Ltd.

The cen­tral bank is in a tight spot, be­cause there will be neg­a­tive con­se­quences whichever way it guides the cur­rency, he ex­plained.

A higher ex­change rate helps keep do­mes­tic liq­uid­ity tight by block­ing fund in­flows, but it hurts ex­ports. A lower rate ben­e­fits ex­ports, but it draws in more funds, which forces the cen­tral bank to re­lease liq­uid­ity.

China re­ported its widest trade sur­plus in al­most five years on Sun­day. The sur­plus rose to $33.8 bil­lion in Novem­ber from $31.1 bil­lion the month be­fore. Ex­ports jumped 12.7 per­cent, well ahead of Oc­to­ber’s 5.6 per­cent growth. Im­ports rose a more mod­est 5.3 per­cent.

The sur­plus with the United States alone was $22.4 bil­lion in Novem­ber.

Zhou said that part of the growth in the ex­port fig­ure in Novem­ber re­sulted from spec­u­la­tive funds, or hot money, in the guise of nor­mal trade. That’s be­cause data on in­dus­trial ac­tiv­ity in the month doesn’t cor­re­spond with the re­ported jump in over­seas ship­ments, he said.

In­dus­trial pro­duc­tion growth ac­tu­ally de­cel­er­ated in Novem­ber to 10 per­cent year-on-year, down 0.3 per­cent­age point from Oc­to­ber, ac­cord­ing to the Na­tional Bureau of Sta­tis­tics.

Lu Zhengwei, chief econ­o­mist with In­dus­trial Bank Co Ltd, agreed with Zhou, in­ter­pret­ing the cen­tral bank’s Dec 6 de­ci­sion to crack down on fake trade fi­nanc­ing as proof that the im­port jump was “prob­lem­atic”.

The PBOC would get some relief if the US Fed­eral Re­serve Board raised in­ter­est rates, but econ­o­mists don’t see that hap­pen­ing any­time soon, de­spite talk that the Fed will end its pol­icy of quan­ti­ta­tive eas­ing.

Russ Koes­terich, global chief in­vest­ment strate­gist with Black­Rock Inc, the world’s big­gest money man­ager, said in a re­search note on Tues­day that while it is still pos­si­ble the Fed will an­nounce ta­per­ing of its bond pur­chases this month, he still feels early 2014 is a more likely time­frame, as eco­nomic growth in the US will re­main mod­est.

It’s widely be­lieved that the Fed will in­crease in­ter­est rates one to two years af­ter it ends QE, and that will erase the in­cen­tive for funds to flow into China for higher in­ter­est rates.

China has also been pur­su­ing in­ter­est rate lib­er­al­iza­tion, which will re­set in­ter­est rate lev­els in the coun­try. The PBOC said over the weekend that it will al­low lenders to is­sue ne­go­tiable cer­tifi­cates of de­posit, with rates based on in­ter­bank rates in Shang­hai.

The CDs “are an im­por­tant step in pre­par­ing banks for fur­ther lib­er­al­iza­tion of client de­posits rates,” Dar­iusz Kowal­czyk, a Hong Kong- based econ­o­mist at Credit Agri­cole CIB, wrote in a re­search note on Tues­day.

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