China’s gold data surprises
Gradual transition to free float
CHINA surprised markets on Friday. This time, it was in gold. China, the world’s biggest producer and consumer of bullion, said that it owns about 1 677.4 tons of the metal.
The previous update came in July after China had been silent on the size of its hoard for six years. Most analysts expected the next report would take about five years, said Ross Norman, chief executive officer of Sharps Pixley, a Londonbased gold dealer. Instead, it happened in 29 days.
The unexpected update of China’s reserves adds to a week that had already seen the first major devaluation of the yuan since 1994.
More regular gold reporting from China shows a shift to transparency as the country improves data quality, increases its presence in commodities trading and promotes the yuan on the international stage.
“It was quite surprising,” Mark O’Byrne, the executive director of Dublin-based brokerage GoldCore, said.
“It looks like they may start reporting on a monthly basis.”
China increased its gold reserves by 1.1 percent in July, or about 19 tons, according to data from the central bank. On July 17, it said it owned
1 658 tons, roughly 600 tons more than when it last updated in 2009.
China has adopted stricter International Monetary Fund norms for its foreign reserves and debt data as it pushes for inclusion of the yuan in the Special Drawing Rights basket.
The changes included monthly release of reserve data rather than quarterly.
“Publishing their gold reserve data for the second month in a row shows they’re becoming more transparent,” Georgette Boele, a currency and precious metals strategist at ABN Amro Bank NV, said in Amsterdam.
THE INTERNATIONAL Monetary Fund (IMF) said China’s move to link the yuan’s value to market forces was an encouraging step toward what may become a freely floated currency within the next few years.
The changes by China would help it gradually transitioning “from a tightly managed system linked to the US dollar to one that is more open and more flexible and more responsive to market conditions”, Markus Rodlauer, the IMF’s mission chief to China, said on Friday. The currency ought to move to “free float” within two to three years, he said.
Rodlauer reiterated the IMF’s assessment that the yuan was no longer undervalued, even after the currency dropped nearly 3 percent last week.
The yuan depreciated 2.9 percent last week after the People’s Bank of China announced its move on August 11 toward a more market-determined rate.
The IMF said later the same day the move “appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate”.
The Chinese government should put in place an “effectively” floating rate for the yuan before fully liberalising its capital markets, the Washington-based fund said.
Decisive role
Moving to a free float was “necessary for allowing the market to play a more decisive role in the economy, rebalancing toward consumption, and maintaining an independent monetary policy as the capital account opens,” the IMF said in the report dated July 7, which was written before China devalued the yuan last week.
The fund is reviewing a bid by China to have the yuan included in the basket of currencies that make up the IMF’s Special Drawing Rights, which countries can count as a reserve asset.
Approval would boost China’s efforts to have the yuan considered a reserve currency, alongside the dollar, euro, yen and British pound.
IMF staff also recommended curtailing interventions, measures such as China took recently to stem a rout in the nation’s stock market.
Chinese policymakers went to unprecedented lengths to put a floor under the market as the Shanghai Composite index slumped more than 30 percent in four weeks to July 8.
The “heavy intervention created risks exacerbating ‘moral hazard’,” fostering a perception the government would not let prices fall below a certain level, IMF staff said in the report on Friday.
“This set of interventions needs to be curtailed to permit a return to normal price discovery,” the report stated.
Banned
In an effort to bolster consumer confidence and prevent soured loans backed by equities from infecting the financial system, China banned large shareholders from selling stakes, ordered state-run institutions to buy shares and let more than half of the companies on mainland exchanges halt trading.
The IMF said China was moving into a phase of “slower, yet safer and more sustainable” growth.
The fund reiterated its projection that the economy would grow 6.8 percent this year, down from 7.4 percent in 2014. Growth would slow to 6.3 percent next year.
Gross domestic product would expand 6 percent in 2017 before rebounding “modestly,” the fund said. Growth should be allowed to slow to 6 percent to 6.5 percent per year to address vulnerabilities in the economy.
China’s reliance on creditfinanced investment as the primary engine of growth since the financial crisis had created “large vulnerabilities” in the fiscal, real estate, financial and corporate sectors, the fund said.
“Thus, a key challenge is to ensure sufficient progress in reducing vulnerabilities while preventing growth from slowing too much,” IMF staff said.
“Over the medium term, this unpleasant trade-off can only be improved by structural reforms that create new sources of growth.” – Bloomberg