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Devaluation of Chinese Currency Sparked Fears of Global Currency War and Accusations of Beijing Unfairly Supporting its Exporters

 August 12, 2015 

 

Chinese Banknotes

 

RMB devaluation warrants no currency war

BEIJING, Aug. 12, 2015 (Xinhua) --

While China's newly announced revision of the yuan's central parity rate formation system earned applause from the International Monetary Fund (IMF), some U.S. lawmakers, not surprisingly, began to grumble again about China's currency reform.

Accusations that China is manipulating the Renminbi (RMB) to gain a trade advantage do not hold water, and their worries that "China is waging a currency war" are exaggerated.

On Tuesday, the People's Bank of China (PBOC) announced that daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange rate market on the previous day, supply and demand in the market, and price movement of major currencies.

Firstly, the decision was made against the background that the RMB's central parity rate has deviated from its actual market rate "by a large extent and for a long duration," which has "undermined the authority and the benchmark status" of the central parity system.

The central bank aims to better reflect market development in the exchange rate between the Chinese yuan against the U.S. dollar, and the yuan's devaluation was a result of reforms intended to make its exchange rate more market-oriented.

The sharp fall in value of the Chinese currency after the announcement is a "one-off" adjustment, which has bridged the previously accumulated differences between the central parity rate and the market rate.

Besides, the exchange rate formation mechanism reform neither simply equals currency devaluation, nor means a devaluation trend of the RMB.

Secondly, China has not devaluated its currency on purpose to benefit its exporters at the expense of overseas competitors. The lower exchange rate is just a byproduct, not a goal.

China's exports have indeed witnessed a slump this year, but this is largely a reflection of sluggish external demand. Fortunately, China has sufficient policy ammunition to boost domestic demand to offset external headwinds.

According to the HSBC, both monetary and fiscal policies are becoming more accommodative and better coordinated, as evidenced by the reports that policy banks will issue more than 1 trillion yuan in financial bonds to support infrastructure investment.

The HSBC forecast that "the combination of monetary and fiscal policy support should help ensure that the economy [is] on a path of cyclical recovery and achieve the growth target of around 7 percent."

Thirdly, a weakening of the currency has resulted from relatively slow real economic growth, and a stable exchange rate needs a steady economy.

As the U.S. economy has gained fresh recovery momentum, it is natural that the U.S. dollar has appreciated.

Meanwhile, China, which is undergoing a "new normal" in its economy that demands shifting its development model to a more balanced and sustainable one, still needs time to stabilize. Thus, it comes as no surprise that the RMB exchange rate will not stabilize until the economy itself is stable.

Editor: Yamei Wang

Chinese yuan extends sharp fall, long-term depreciation unlikely

BEIJING, Aug. 12, 2015 (Xinhua) --

Chinese currency continued to fall on Wednesday after the central bank reformed the exchange rate formation system to better reflect the market.

The central parity rate of renminbi, or yuan, weakened by 1,008 basis points, or 1.6 percent, to 6.3306 against the U.S. dollar, narrowing from Tuesday's 2 percent, according to the China Foreign Exchange Trading System.

The People's Bank of China (PBOC), the central bank, changed the exchange rate formation system so that it takes into consideration the closing rate of the inter-bank foreign exchange market on the previous day, supply and demand in the market and price movement of major currencies.

The International Monetary Fund (IMF) described the central bank's move as "a welcome step" that allows market forces to have a greater role in determining the exchange rate.

"Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said in an email on Wednesday.

The IMF said it believes the country can achieve an effective floating exchange rate system within two or three years.

However, the move still surprised the market and prompted the lowest valuation of the yuan since October 2012.

Ma Jun, chief economist at the PBOC's research bureau, attributed the lower rate to a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market.

In a latest statement released on Wednesday, the PBOC said the rate changes are normal, as it shows a more market-based system and the decisive role that the supply-demand relationship plays in determining the exchange rate.

"This may lead to potentially significant fluctuations in the short run but after a short period of adaptation the intra-day exchange rate movements and resulting central parity fluctuations will converge to a reasonably stable zone," the PBOC said.

Ma also said the shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation.

A relatively robust economy, current account surplus and the internationalization of the yuan will help the currency remain stable, the PBOC said.

Official data showed the Chinese economy maintained 7 percent growth in the first half of 2015 against challenges at home and abroad, creating sound conditions for the yuan to hold steady.

Surplus in goods trade reached 305.2 billion U.S. dollars in the first 7 months, a fundamental prop for the exchange rate.

An internationalized yuan and open financial sector have boosted the demand for the currency in recent years, which serves as momentum for the rate's stabilization, the PBOC said.

In addition, the PBOC also cited China's abundant foreign exchange reserves, stable fiscal condition and healthy financial system.

The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.

The PBOC said it will strive to further improve market-based exchange rate formation, maintain normal fluctuations and keep the rate basically stable at an adaptive and equilibrium level.

Yuan weakening is not devaluation: central bank economist

BEIJING, Aug. 11, 2015 (Xinhua) --

Allowing the Chinese yuan to weaken sharply against the U.S. dollar does not signify the beginning of a downward trend, a central bank economist said on Tuesday .

The yuan central parity rate announced by the China Foreign Exchange Trading System (CFETS) stood at 6.2298 against the greenback on Tuesday compared to 6.1162 on Monday, down nearly 2 percent, the lowest level since April, 2013.

The shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation, said Ma Jun, chief economist at the research bureau of the People's Bank of China (PBOC).

The central parity rate is based on a weighted average of prices offered by market makers before the opening of the interbank market each trading day. The currency is allowed to trade on the spot market within 2 percent of the rate.

The PBOC said Tuesday's lower rate resolved accumulated differences between the central parity rate and the market rate, and was part of improvements to the central parity rate formation system to make it more market-based.

Ma said a long-standing gap between the central parity rate and the previous day's closing rate on the inter-bank market led to the lower rate on Tuesday.

He said China's economic fundamentals support a "basically stable" yuan exchange rate. A central parity rate closer to the market rate will provide a more stable environment for macro-economic development.

The economy has shown signs steadying and recovery, with infrastructure investment accelerating and property sales improving. Compared with some economies under strong pressure to depreciate their currencies, China is better-off, with a current account surplus, huge foreign exchange reserves, low inflation and sound fiscal conditions, he explained.

From Tuesday, daily central parity quotes reported to CFETS before the market opens will be based on the previous day's closing rate on the inter-bank market, supply and demand and price movements of other major currencies, according to the PBOC.

In July 2005, the central bank unpegged the yuan against the U.S. dollar, allowing it to fluctuate against a basket of currencies.

Making formation of the central parity rate more market-based touches on the core of reform, compared with previous steps that mainly concerned how much the yuan can fluctuate, said Guan Tao, former head of the international payments department at the State Administration of Foreign Exchange.

The yuan was at first allowed to vary by 0.3 percent from the central parity rate each trading day and the trading band gradually expanded to 2 percent in March last year. The market expects it to expand to 3 percent in the near future.

The latest reform actually increases China's flexibility and independence in foreign exchange control, as a rigid exchange rate system is open to speculative attacks, Guan told China Business News.

Two-way fluctuations will become normal for the yuan in future, he said.

Editor: An

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China central bank under pressure to weaken yuan further

BEIJING | By Kevin Yao

Wed Aug 12, 2015 8:50am EDT, Reuters --

China's move to devalue its currency reflects a growing clamor within government circles for a weaker yuan to help struggling exporters, ensuring the central bank remains under pressure to drag it down further in the months ahead, sources said.

The yuan has fallen almost 4 percent in two days since the central bank announced the devaluation on Tuesday, but sources involved in the policy-making process said powerful voices inside the government were pushing for it to go still lower.

Their comments, which offer a rare insight into the argument going on behind the scenes in Beijing, suggest there is pressure for an overall devaluation of almost 10 percent.

"There have been internal calls for the exchange rate to be more flexible, or depreciated appropriately, to help stabilize external demand and growth," said a senior economist at a government think-tank that advises policy-makers in Beijing.

"I think yuan deprecation within 10 percent will be manageable. There should be enough depreciation, otherwise it won't be able to stimulate exports."

The Commerce Ministry, which on Wednesday publicly welcomed the devaluation as an export stimulus, had led the push for Beijing to abandon its previous strong-yuan policy.

Reuters could not verify how much influence Commerce Ministry officials had wielded in the decision to drive the yuan lower, but the sources said its officials were claiming victory after a long lobbying campaign against what some of them regarded as over-zealous reform led by the central bank.

The People's bank of China (PBOC) had been keeping the yuan strong to support the ruling Communist Party's goal of shifting the economy's main engine from exports to domestic demand.

A stronger yuan boosts domestic buying power, helps Chinese firms to borrow and invest abroad, and encourages foreign firms and governments to increase their use of the currency.

Until the devaluation, the currency had appreciated overall by 14 percent over the past 12 months on a trade-weighted basis, according to data from the Bank for International Settlements.

CHANGE OF COURSE

Premier Li Keqiang had repeatedly ruled out devaluation, but increased risks to economic growth, exacerbated by recent stock market turmoil, increased pressure to reverse course, the sources said.

At the weekend, China posted a shock 8.3 percent slump in July exports.

"Exporters face very big pressure, and China's economy also faces very big downward pressure," said a researcher at the commerce ministry's own think-tank, which recommended earlier this year that the government should unshackle the yuan.

"The yuan depreciated only slightly versus the dollar, but it has gained sharply against other currencies. China's economy and trade are no longer strong; why should the yuan be strong?"

He said he believed the yuan CNY=CFXS could fall to 6.7 by year-end, which would represent a near 9 percent decline since the eve of the devaluation. It traded around 6.43 against the dollar on Wednesday, its lowest since August 2011.

The PBOC described its devaluation as a one-off move designed to make the currency more responsive to market forces.

The central bank guides the market daily by setting a reference rate for the yuan, from which trade may vary only 2 percent. On Tuesday, it said it was setting the midpoint based on market forces, which have been willing the yuan lower.

BEIJING DETERMINED TO MEET TARGET

Beijing is determined to achieve its economic growth target of 7 percent for this year. Top leaders will chart the course for the next five years at a meeting in October, and they are likely to continue targeting annual growth of around 7 percent.

"They (top leaders) are determined to hit 7 percent target. The downward pressure is big (but) so is the determination," said an economist inside the cabinet's think-tank.

Beijing prefers a gradual devaluation because a single, big move could spark capital flight and undermine its goal of fostering global use of the yuan in trade and finance, sources said.

China has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

The IMF said on Wednesday that the central bank's new way of managing the exchange rate appeared to be a welcome step.

"There is definitely downward pressure on the economy, but we cannot rely (alone) on currency depreciation," said Zhu Baoliang, chief economist at the State Information Centre, a top government think-tank.

(Editing by Mark Bendeich and Will Waterman)

 

China lets yuan fall further, fuels fears of currency war

SHANGHAI | By Pete Sweeney and Lu Jianxin

Wed Aug 12, 2015 9:24am EDT, Reuters --

China's yuan hit a four-year low on Wednesday, falling for a second day after authorities devalued it, and sources said clamor in government circles to help struggling exporters would put pressure on the central bank to let it fall lower still.

Spot yuan in China dropped to as low as 6.4510 per dollar, its weakest since August 2011, after the central bank set its daily midpoint reference at 6.3306, even weaker than Tuesday's devaluation.

The currency fared worse in international trade, touching 6.59.

The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.

The devaluation had sparked fears of a global currency war and accusations that Beijing was unfairly supporting its exporters.

"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the People's Bank of China (PBOC) said.

Foreign exchange traders later said state-owned banks were selling dollars on behalf of the PBOC, and the spot market ended at 6.3870, after rallying strongly towards the close, which will influence Thursday's midpoint.

"Apparently, the central bank does not want the yuan to run out of control," said a trader at a European bank in Shanghai.

A trader at another European bank said the unexpected devaluation had caused "some panic" in markets.

Analysts at BMI downgraded their year-end forecasts for the currency to 6.83, down 10 percent from pre-devaluation levels.

The yuan has lost 3.5 percent in China in the last two days, and around 4.8 percent in global markets.

Its slide pulled down other Asian currencies on Wednesday, with Indonesia's rupiah and Malaysia's ringgit hitting 17-year lows, and the Australian and New Zealand dollars touching six-year lows.

Indonesia's central bank pinned the rupiah's fall directly on the yuan devaluation and said it would step into the foreign exchange and bond markets to curb volatility.

POOR ECONOMIC DATA

Tuesday's devaluation, the biggest one-day fall since 1994, followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate that would make Chinese exports cheaper.

Last weekend, data showed an 8.3 percent drop in exports in July and that producer prices were well into their fourth year of deflation.

China's Ministry of Commerce acknowledged on Wednesday that the depreciation would have a stimulative effect on exports.

Sources involved in the policy-making process said powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 percent.

Data on Wednesday underlined sluggish growth in the world's second-largest economy. Factory output growth slipped to 6 percent in July from a year earlier, missing market forecasts, while fixed asset investment and retail sales were also lower than expected.

There was also a jump in fiscal expenditure of 24.1 percent in July, which reflects Beijing's efforts to stimulate economic activity.

PLAYING TO THE IMF?

The International Monetary Fund said China's move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim for an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies known as Special Drawing Rights, which it uses to lend to sovereign borrowers, a major step in terms of international use of the yuan.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said.

The devaluation was decried by U.S. lawmakers from both parties on Tuesday as a grab for an unfair export advantage and could set the stage for testy talks when Chinese President Xi Jinping visits Washington next month, given acrimony over issues ranging from cyber security to Beijing's territorial ambitions.

Not all countries consider the devaluation a threat, however. Korea's Finance Minister Choi Kyung-hwan said it would be positive for Korean exports to China, much of which were intermediate items and not in direct competition with Chinese products.

While a weaker yuan will not cure all the ills of China's exporters, it will help relieve deflationary pressure.

Falling commodity prices have been blamed for producer price deflation, putting China at risk of repeating the deflationary cycle that blighted Japan for decades.

Growth in China has slowed markedly this year and will hit a 25-year low even if it meets its official 7 percent target.

Some economists believe China's economy is already growing only half as fast as official data shows, or even less.

(Additional reporting by Samuel Shen in SHANGHAI and Jason Subler in BEIJING; Writing by Will Waterman; Editing by Kim Coghill and Mike Collett-White)

 

Eyes on U.S. economy, Fed likely unmoved by China devaluation

NEW YORK | By Jonathan Spicer

Tue Aug 11, 2015 10:26pm EDT, Reuters --

China's currency devaluation on Tuesday is unlikely to distract the U.S. Federal Reserve from a domestic economy that appears increasingly ready for higher interest rates.

The U.S. central bank will hope that the surprise move is not the beginning of a series of competitive devaluations that could send the dollar much higher than its slight rise on Tuesday, weakening already soft U.S. inflation, economists and Fed watchers said.

But as it considers whether to lift rates as soon as next month, the Fed's key focus is the growing durability of the U.S. labor market. Fed policymakers could even see China's devaluation as boosting global growth if it helps shore up a stumbling Chinese economy that has hit world commodity prices and financial markets.

"I don't see this affecting the Fed decision unless it develops into something that roils markets substantially," said Peter Hooper, chief economist at Deutsche Bank Securities and a former Fed economist.

"It adds a little more drag to the economy via net exports and puts a slight damper on consumer prices, but not enough to alter the course of the U.S. economy or labor market significantly," he said.

The People's Bank of China set the yuan's peg to the dollar about 2 percent lower, calling it a "one-off depreciation" that helps align the currency with others that have slipped as the Fed has prepared to tighten monetary policy.

Fed officials say the dollar's year-long rise, alongside tumbling oil prices and weaker economies abroad, has put downward pressure on stubbornly low domestic prices and has played at least some role in delaying rates "liftoff."

Stanley Fischer, the Fed's vice chair, said on Monday the global disinflationary trend "bothers" the Fed. But "primarily the U.S. economy depends on itself - not only, but to a considerable extent," he added in a television interview.

U.S. central bankers could raise rates for the first time in nearly a decade at a Sept. 16-17 meeting.

Atlanta Fed President Dennis Lockhart and other policymakers say that between now and then, data on U.S. jobs growth, inflation, and retail sales will inform that decision, suggesting only a big shock from abroad could throw things off.

Analysts say it is more likely that the path of subsequent rate rises would hinge more on inflation and the dollar, which could react strongly to further competitive devaluations from China in response to worsening data there.

Roberto Perli, partner at economic research firm Cornerstone Macro, said Tuesday's devaluation should appreciate the dollar by 0.4 percent given the yuan's trade-weighted effect.

"The Fed is likely to think that today's move reduces the risks to the U.S. economy, just like any other foreign easing move does," he wrote to clients.

"This should at least partly offset the stronger dollar and leave the odds of a liftoff later this year, probably in September, little changed for now."

(Reporting by Jonathan Spicer; Additional reporting by Howard Schneider in Washington; Editing by Meredith Mazzilli)

 

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