Yuan gains but China warns it won't fix economy

[momopi]

latimes.com/business/la-fi-yuan-20100622,0,2392375.story

latimes.com
Yuan gains but China warns it won't fix economy
Associated Press

8:11 AM PDT, June 21, 2010

China followed through Monday on its pledge to allow greater flexibility in exchange rates, but said an appreciation in its currency alone could not rebalance world growth as it urged world leaders to carry out more fundamental reforms.

By late Monday, the yuan was trading at 6.7971 to the U.S. dollar in the spot market, strengthening from 6.8272 on Friday — as the central bank delivered on its weekend promise to give up the dollar peg imposed two years ago to help Chinese exporters cope with the global downturn.

For the past two years, Beijing has kept the yuan trading in a much narrower band around 6.83 to $1.

But analysts said the move was mainly aimed at countering criticism of Beijing's currency policies ahead of this weekend's summit of the Group of 20 leading economies and would not result in any significant shifts in exchange rates. The yuan is still subject to a 0.5 percent daily trading range, limiting potential volatility.

"The yuan will gain very soon, but definitely not much. It was more of a strategic maneuver to silence outside criticism," said Qian Qimin, a market analyst at Shenyin Wanguo Securities, in Shanghai.

The central bank said plans to allow greater currency flexibility were in line with China's own needs and would help Beijing fight inflation, encourage manufacturers to improve efficiency and reduce the country's reliance on exports as a key driver for growth.

U.S. Ambassador to China Jon Huntsman called the move a "genuine attempt" by China to have greater flexibility in its exchange rate mechanism. He said a stronger yuan would boost the purchasing power of Chinese buyers and help U.S. exports.

U.S. lawmakers have strongly criticized China's exchange rate policy, saying an undervalued yuan has cost millions of American jobs. Washington and other trading partners complain that an undervalued yuan gives China's exporters an unfair advantage.

"When you stop to consider that every billion dollars in exports creates 22,500 jobs, that's a very big deal at a time when we're facing very high rates of unemployment," Huntsman told the Hong Kong General Chamber of Commerce. "It takes an irritant off the table in the U.S.-China relationship."

China's economy surged 11.9 percent in the first quarter of this year and exports jumped by nearly 50 percent over a year earlier in May, despite expectations that Europe's debt crisis would hit demand in the 27-nation European Union, China's biggest trading partner.

"The large trade surplus gives the government confidence and room to loosen controls over the exchange rate," Qian said, since a stronger yuan would make Chinese exports more expensive.

The announcement by the People's Bank of China that it would revert to relying on a basket of currencies that includes the U.S. dollar to determine the exchange rate, rather than the dollar alone, reflects a return to policies in force before the global financial crisis walloped Chinese manufacturers in 2008, putting millions of workers out of their jobs.

But while it has pledged to keep moving gradually toward more market-based exchange rates, Beijing still insists that its policy of keeping the currency stable is crucial for economic recovery, ruling out any significant one-off revaluations.

"The official announcement should be interpreted first and foremost as an important signal towards a more flexible exchange rate, rather than a significant revaluation of the Chinese yuan," UBS economist Wang Tao said in a report on the change.

China let the yuan to rise by about 20 percent beginning in 2005, but halted its rise in 2008. The government sets the rate each day before the start of trading and retains powerful tools to control its movement.

Many countries have slammed Beijing for this policy, complaining that an undervalued yuan unfairly drives down the price of Chinese products and makes them impossible to compete with.

China has sought to deflect this criticism, noting that the causes of the global crisis lay well beyond its door, and a commentary Monday by the official Xinhua News Agency said the G-20 leaders must focus on more urgent global reforms.

"If they cannot make good use of the coming G20 summit to press ahead with the much-needed overhaul of the global financial system, the international community will soon find to its disappointment that its leaders look only for red herrings, rather than real solutions, at a time when true leadership is badly needed," it said.

Regional markets gained Monday, as investors relieved of uncertainty over China's currency policy bought airlines and other heavyweight shares.

"The markets were boosted because investors are becoming less risk averse than before. They are more aggressive," said Ben Kwong Man Bun, chief strategist for KGI Securities in Hong Kong.

While foreign manufacturers have welcomed the relief a stronger yuan would bring, exporters in China, already operating on razor-thin margins, were less pleased.

"The exchange rate problem is one we would have to face sooner or later. That is a fact we have to accept," said Bai Ming, deputy general manager of Zhejiang Mingfeng Car Accessories Co., which exports car covers to the Americas, Europe and South Korea.

Bai, whose factory employs 950 people, said his company's export orders were outpacing his capacity to meet them. But with labor and other costs rising, the company will have to find a ways to stay competitive.

"What we are trying to do is to raise productivity and save costs. We cannot just sit back and wait," he said.

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

[momopi]

http://www.chinapost.com.tw/business/gl ... -soars.htm


Yuan soars to post-revaluation high

Tuesday, June 22, 2010
By Lu Jianxin and Koh Gui Qing, SHANGHAI, Reuters

China's yuan soared on Monday to its highest against the dollar since the landmark 2005 revaluation, with the central bank stepping aside and tolerating broad gains on the first trading day since scrapping the currency's two-year peg to the dollar.
The central bank declined to intervene, one of the few times in the yuan's modern history that is has stepped aside, and appeared to want the market to drive intraday trade, backing up its weekend pledge to allow greater flexibility.

Traders said it was unlikely the yuan would repeat gains on the same scale in coming days, with Tuesday's mid-point setting serving as an important barometer of how much more appreciation the People's Bank of China is willing to stomach.

"You cannot expect the yuan to shoot up 5 percent in two or three weeks, as the pace of Monday's rise implies," said a dealer at a North American bank in Shanghai.

Several dealers said they expected the PBOC to keep the mid-point unchanged on Tuesday, or even push it up as much as 50 pips, to effectively cap how much the yuan could rise.

The yuan is allowed to rise or fall 0.5 percent versus the dollar from the daily mid-point but rarely moves toward the extremes of that tight trading band.

The yuan closed at 6.7976 against the dollar, up 0.42 percent from Friday's close and marking its biggest daily gain against the U.S. currency since the revaluation set the currency free to move in a managed floating exchange rate system.

The yuan climbed as far as 6.7958 in intraday trade, another post-revaluation record and gained as much as 0.47 percent from the central bank's mid-point, nearly reaching the 0.5 percent daily trading band limit.

Under intense pressure to act before the Group of 20 meeting in Canada later this week, China ditched the dollar peg -- an emergency measure used to shield the economy from the global financial crisis and resulting recession.


NO REVALUATION


The central bank on Sunday ruled out a one-off revaluation similar to that of July 2005 and said there was no basis for any big appreciation, adding that it would keep the exchange rate at a basically stable level.

Before trade started on Monday, the PBOC set the yuan's daily mid-point at the same level as Friday -- 6.8275 -- disappointing some offshore players who were hoping for a clear sign of appreciation.

But as the PBOC pulled back from its often heavy daily interventions, foreign and Chinese banks drove the yuan sharply higher, suggesting that the PBOC is allowing the currency to become more market-driven during the day.


"If it wants, it can make its intentions clearly felt with tomorrow's mid-point, which will tell the market how much it will allow the yuan to rise in one day," said a dealer at a European bank in Shanghai.

A mid-point near the average of Monday's spot trades -- estimated by traders at about 6.8100 against the dollar -- would suggest the PBOC will tolerate more yuan strength heading into a Group of 20 meeting later in the week.

The rise in yuan implied volatility was limited, suggesting the market was not yet preparing for sharp gains or big daily swings like those seen on Monday.


NDFs JUMP, THEN STEADY


Foreign hedge funds and other players drove down dollar/yuan non-deliverable forwards, but not as sharply as might have been expected given the big move in spot, traders said.

In part that was because funds had already built up short positions before the surprise weekend announcement, and also because the PBOC's decision to keep the mid-point unchanged sparked a round of short covering.

Some traders said the steady mid-point on Monday was a deliberate effort by Chinese authorities to fend off speculators betting on yuan appreciation.

Even with the depegging of the yuan from the dollar, most traders are maintaining forecasts for the yuan to rise a maximum 3 percent in 6 months and 5 to 6 percent in a year.

Near-term three-month dollar-yuan non-deliverable forwards were quoted at 6.7350 in late trade, implying yuan appreciation of 1.4 percent over that period, but off a two-year low of 6.7200 hit in early trade against Friday's close of 6.7810.

One-year NDFs were at 6.6350 bid in late afternoon, implying 2.9 percent appreciation in a year compared with 1.8 percent implied on Friday, as measured from the mid-point. They had initially fallen as low as 6.6210.



Copyright © 1999 – 2010 The China Post.

[globetrotter]

It is limited to 00.5% movement per day and it moved that today, -0351 pips from 6.8351 to 6.8000.

Not much, you say? In 180 days the Yuan could be at 3.000 with this scheme.

It is rewarding when you make a decision and it pans out as you planned.

[momopi]

I went to dinner with a friend of mine who is going to Bei Da (Beijing Normal University) for her grad school later this year. Sucks that this is going to cost more for her.

[Repatriate]

I went to dinner with a friend of mine who is going to Bei Da (Beijing Normal University) for her grad school later this year. Sucks that this is going to cost more for her.

Is she converting American dollar savings or using Chinese Yuan savings? Because if it's the latter her cost of living might in fact drop over the next couple of years because imported products should in theory become cheaper as the Yuan becomes stronger which means your everyday Chinese consumer will get a big 20-30% cut in prices.

The whole Yuan valuation issue is much more complex than simply trade between China and the U.S. I've read a lot of articles on this issue and most economists believe that China is doing it to contain some of the economic overheating that could happen.

Peter Schiff, one of the leading analysts who predicted the 2008 financial crisis, gives his two cents on the whole issue.

http://seekingalpha.com/article/194525- ... vs-reality

[momopi]

I went to dinner with a friend of mine who is going to Bei Da (Beijing Normal University) for her grad school later this year. Sucks that this is going to cost more for her.

Is she converting American dollar savings or using Chinese Yuan savings? Because if it's the latter her cost of living might in fact drop over the next couple of years because imported products should in theory become cheaper as the Yuan becomes stronger which means your everyday Chinese consumer will get a big 20-30% cut in prices.

Covering from USD to RMB. I think the tuition, room, and board is fixed price in RMB. If she was doing "study abroad" from US university, then the prices would've been fixed in dollars. But if you apply directly to the school, the prices are in RMB. I'll have to check with her on the estimated costs.