IFF: CHINA’S EXPORT MARKET HEALTHY DESPITE OUTFLOWS ON WEAK YUAN
▶ US tariffs exert pressure on the currency, which the institute says is an ‘important issue’ for the country
Capital outflows from China are rising on concerns of a weakening yuan and at a faster pace than in 2012 during a corruption crackdown, according to a report from the Institute of International Finance.
“It is possible that US tariffs, which should exert depreciation pressure on the RMB [yuan], are gradually causing expectations to build that the RMB will weaken, which could be generating these outflows. We see this as an important issue for China policymakers and EM [emerging market] investors,” the IIF said.
China’s current account surplus, however, is at its highest in four years.
“Ongoing US-China trade tensions should be exerting strains on China’s balance of payments. This should be most obvious on the current account and trade side, where exports should be weakening. However, the current account surplus is on a rising trajectory, partly due to exports that still look quite healthy and somewhat lower imports,” the report said.
The institute put China’s current account surplus at $212 billion (Dh778.57bn) this year, the highest since 2015.
The US and China, the world’s two largest economies, are engaged in a trade war, levying tariffs on each other’s goods, which is impacting growth in both countries and raising fears of a global recession.
The US increased tariffs on $250bn of Chinese goods in May, while Beijing responded with additional levies on nearly $60bn of US imports. Washington is set to levy another 10 per cent in duties on $300bn of Chinese imports in the coming months.
Meanwhile, Bank of Singapore said in a separate report that a trade war escalation and the drag on global growth points to a higher medium-term risk of a weaker yuan and a stronger gold price.
“We revised the 12-month USDCNY [US dollar to Chinese yuan] forecast to 7.20 [from 6.80] and $1,600 [from $1,500] for gold. These revised forecasts assume no deal but also no further trade war escalation although it is entirely possible that President Trump could raise the latest 10 per cent tariffs to 25 per cent at the beginning of 2020,” the lender said.
“While a weaker CNY would help offset any tariff hit, recent USDCNY fixings – despite crossing above 7.0 – signalled that Chinese authorities are not about to allow a runaway CNY depreciation to damage onshore confidence and add to capital flight pressures.”
Bank of Singapore said the fallout from the recent depreciation of the yuan, which saw it slip through the key rate barrier of 7 yuan per dollar, had “so far been manageable, as onshore USDCNY turnover volume data suggest it did not come with signs of “panic” CNY selling”.
The breaching of the 7 yuan barrier led to the US labelling China as a currency manipulator. The current exchange rate is 7.04 yuan to the dollar.
China’s central bank unveiled a key interest rate reform yesterday to help steer borrowing costs lower for companies and support a slowing economy that has been affected by a trade war with the US.
The People’s Bank of China said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.
Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.
“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates,” the PBOC said.
The central bank will “deepen market-based interest rate reform, improve the efficiency of interest rate transmission, and lower financing costs of the real economy”, it said.
Chinese banks’ new LPR quotations will be based on rates of open market operations, and the national interbank funding centre will be authorised to publish the rate from August 20, the PBOC said. It added the rate will be published every month on the 20th, effective this month.
Banks must set rates on new loans by mainly referring to the LPR and use LPR as the benchmark for setting floating lending rates, the PBOC said, adding that banks will be barred from setting any implicit floor on lending rates in a co-ordinated way.
The central bank said fiveyear and longer tenors will be added to the existing one-year LPR, which will help banks set rates on long-term loans such as mortgages.
China will add eight small banks, including two foreign-funded banks, to the existing 10 nationwide banks that will be allowed to submit LPR quotations, the central bank said.
The move followed pledges from China’s State Council on Friday that the country will rely on market-based reform measures to help lower real interest rates for companies.
The central bank said it will strengthen its supervision on banks’ rate quotations and punish banks for irregularities that disrupt the market order.
The central bank will incorporate LPR application into its macroprudential assessment to urge banks to use LPR pricing. Last week’s data broadly showed China’s economy stumbled more sharply than expected at the start of the third quarter, as the intensifying trade war with the US took a heavier toll on businesses and consumers. Second-quarter economic growth slowed to a near 30-year low.
Tang Jianwei, an economist at Bank of Communications in Shanghai, said the reform could be seen as a guided rate cut as PBOC can guide rates of its open market operations, which will be closely followed by the LPR.
“The tool [LPR quotation reform] equals to a guided rate cut, and is only pushed out by the PBOC at crucial moments,” said Dai Zhifeng, analyst with Zhongtai Securities.
The central bank has pledged to gradually unify two interest rate “tracks” – its market-based rates developed in recent years and its benchmark bank deposit and lending rates.
Analysts say the new LPR rate will be lower than the current level, but they are divided over the scope of reductions on borrowing costs for firms.
To free up funds for lending and to accommodate local government project financing, most analysts still expect the central bank will cut banks’ reserve requirement ratios further in coming months, on top of six reductions since early 2018.
Sources said that more aggressive action such as interest rate cuts are a last resort, as it could fuel a sharper buildup in debt. In July, central bank head Yi Gang said China would keep its benchmark deposit rate for a relatively long time, but would phase out its benchmark lending rate in the push to unify the lending rate and market-based rates.
China’s banks currently price their loans based on the benchmark lending rate that has been kept unchanged since October 2015, hampering the central bank’s efforts to lower borrowing costs.
The country’s short-term money market rates have been falling more quickly in recent months due to the central bank’s cash injections.
The People’s Bank of China said it will improve the mechanism used to establish the loan prime rate from this month