China tries to dampen fears of more de­val­u­a­tions

The Pak Banker - - COMPANIES/BOSS -

China tried Thurs­day to ease fears of more big declines for the yuan as com­pa­nies from global au­tomak­ers to Chi­nese cloth­ing ex­porters faced a new era of un­cer­tain ex­change rates. There is "no ba­sis for per­sis­tent and sub­stan­tial de­val­u­a­tion," said a deputy cen­tral bank gover­nor, Zhang Xiao­hui, at a news con­fer­ence. Zhang said the yuan is close to "mar­ket lev­els" af­ter two days of sharp declines. By mid­day on Thurs­day, the yuan was down 2.9 per­cent since Tues­day's sur­prise an­nounce­ment of a more flex­i­ble ex­change rate. The Peo­ple's Bank of China said the change was aimed at mak­ing the tightly con­trolled yuan more mar­ket-ori­ented.

Many econ­o­mists said the de­cline was too small to help Chi­nese ex­ports due to weak global de­mand. But the change fu­eled con­cern the yuan might fall fur­ther, giv­ing Chi­nese traders a price ad­van­tage over for­eign ri­vals and pos­si­bly ig­nit­ing a "cur­rency war" if other gov­ern­ments fight back by de­press­ing their own ex­change rates.

"The im­pact on for­eign ex­porters is only be­gin­ning," said Evan Lu­cas, a fi­nan­cial mar­ket strate­gist for the Aus­tralian firm IG Mar­kets, in a re­port.

In­ter­na­tional traders have long coped with swings by the dol­lar, euro and other cur­ren­cies. They can hedge, or in­sure against un­fa­vor­able changes, by sign­ing con­tracts to buy them at fixed prices on fu­ture dates. Large man­u­fac­tur­ers also put fa­cil­i­ties in mul­ti­ple lo­ca­tions, al­low­ing them to switch pro­duc­tion to low­er­cost sites as cur­ren­cies fluc­tu­ate.

On a larger scale, how­ever, more flex­i­bil­ity could end the yuan's sta­tus as a sta­ble an­chor among cur­ren­cies of de­vel- op­ing coun­tries, said Ra­jiv Biswas, chief Asia economist for IHS.

If it leads to more de­val­u­a­tions, "it could in­crease un­cer­tainty and tur­moil in global cur­rency mar­kets," said Biswas in an email. At the news con­fer­ence, the cen­tral bank's chief deputy gover­nor re­jected sug­ges­tions Bei­jing planned to de­pre­ci­ate the yuan by up to 10 per­cent to help ex­porters.

"This is sheer non­sense. It is to­tally un­founded," said the of­fi­cial, Yi Gang. Fi­nan­cial mar­kets re­sponded to the cen­tral bank com­ments by boost­ing the yuan. The cur­rency was down 0.8 per­cent at mid­morn­ing Thurs­day but af­ter the news con­fer­ence that nar­rowed to a 0.2 per­cent de­cline com­pared with Wed­nes­day's clos­ing price. "This should pour cold wa­ter on claims that the PBOC is try­ing to de­value the cur­rency in or­der to shore up ex­ports," said Ju­lian Evans-Pritchard of Cap­i­tal Eco­nom­ics in a re­port. "A larger-scale weak­en­ing of the ren­minbi looks in­creas­ingly un­likely."

The global im­pli­ca­tions of a more flex­i­ble yuan are mag­ni­fied by China's sta­tus as the world's No. 2 econ­omy and big­gest ex­porter, the top trad­ing part­ner for most of Asian neigh­bors and also a com­peti­tor with Ja­pan, Korea, Thai­land and oth­ers in for­eign mar­kets for steel, shoes, toys and other goods.

Un­der its latest pol­icy change, the Chi­nese cen­tral bank said the band within which the yuan is al­lowed to fluc­tu­ate by 2 per­cent up or down each day will be based on the pre­vi­ous day's trad­ing and data on cur­rency sup­ply and de­mand. That re­placed a strat­egy un­der which the rate was based on a bas­ket of cur­ren­cies.

The bank had al­lowed lit­tle move­ment against the dol­lar since the 2008 global cri­sis. That pushed up the yuan as the dol­lar rose over the past year, hurt­ing Chi­nese ex­porters as other de­vel­op­ing coun­try cur­ren­cies fell. The cen­tral bank said it acted be­cause the Chi­nese cur­rency was ris­ing while mar­ket forces said should fall.

The move to­ward more flex­i­bil­ity at a time when mar­ket pres­sures were set to push the yuan down left Washington and other trad­ing part­ners that have crit­i­cized 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 U.S. 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 U.S. trade deficit with China will sharpen con­gres­sional crit­i­cism of China's cur­ren- cy poli­cies," he said.

"But the ad­min­is­tra­tion has no eco­nomic ba­sis for crit­i­ciz­ing China's move," said Prasad. "In­deed, pre­vent­ing the yuan from de­pre­ci­at­ing fur­ther would run counter to U.S. and IMF calls for a more mar­ket-de­ter­mined ex­change rate."

Fi­nan­cial an­a­lysts say the yuan could be over­val­ued by up to 10 per­cent. That would mean al­low­ing mar­ket forces free rein might push it down even fur­ther.

For au­tomak­ers and other global com­pa­nies that in­creas­ingly rely on sales to China, that could erode rev­enues as they are brought home and con­verted into for­eign cur­rency. Al­ready this year, Volk­swa­gen and Hyundai have re­ported profit declines due to weaker Chi­nese sales. With many au­tomak­ers re­port­ing declines in July sales, such losses could be mag­ni­fied by fur­ther weak­en­ing of the yuan.

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