China To Remain On The Fence. By Nicholas Hastings
To expect a dramatic shift in Chinese policy at this stage, either on foreign exchange reserves or the yuan, is foolhardy.
With a sovereign debt crisis still very much a threat and the global economic recovery looking very vulnerable, the most that can be expected from Beijing is some tiny incremental move in policy just to keep the critics at bay.
This will probably take the form of a slight widening in the yuan's trading band against the dollar.
In the first instance, a wider band would provide scope for monetary tightening that would help address China's growing inflationary problems and slow the rally in property prices.
In the second, it would answer criticism from the U.S. and elsewhere that a cheap yuan is damaging their export growth.
There are two major reasons why Beijing is not about to revalue the yuan any more dramatically just now.
The recent fall in the euro has already undermined the yuan's competitiveness in European markets, which account for as much as 25% of Chinese exports.
With the euro widely expected to fall even more, China is hardly likely to accelerate the yuan's relative rise and damage exports even further.
Not only would this hurt China's own growth prospects but it would be bad news for global growth, which is already being downgraded because of greater fiscal austerity in the euro zone.
So the most that can be expected from the Peoples' Bank of China some time this summer is a minimal move that allows the yuan to fluctuate just a little bit more against its central peg against the dollar.
If nothing else, this should reduce calls from the U.S., as well as many emerging markets, for China to stop keeping the price of Chinese exports artificially low.
The recent fall in the euro has also triggered speculation that China will reduce its exposure to euro assets.
In recent years, the PBOC has pursued a policy of diversification of its new foreign exchange reserves, buying more euros rather than U.S. dollars.
This policy has been followed by many other central banks accumulating reserves as they acknowledged the growing importance of the euro and fears about the long-term strength of the dollar.
Given the euro's nearly 20% slide in value against the dollar since late last year, it isn't surprising that China, or in fact any other country, might review their policy.
However, any suggestion that China--which holds $2.5 trillion of reserves--is about to start moving out of the euro would only bring about the sort of sharp decline in the single currency that Wednesday's report in the Financial Times triggered.
Thus, selling the euro at this stage could well prove self-defeating, not only in terms of the value of reserves but also in terms of Chinese exports to Europe.
In the meantime, as Chinese officials have confirmed, the country's diversification policy remains unchanged. The central bank will continue buying, as it has in the past, as any shift would incur even more damage to an already fragile euro.
Overnight markets continued to be cheered by China's comments that rumors of diversification were groundless.
Global equity markets rallied hard with the Dow Jones Industrial Average gaining 2.9% and the Nikkei following up with a 1.3% gain Friday.
Commodity currencies surged with the Australian dollar adding some 3.5%, the Canadian dollar 2% and oil gaining over $3 to trade above $74 a barrel.
Around 0645 GMT the euro, which came within a whisker of a fresh four-year low Thursday, is trading some two cents higher around $1.2355, unchanged from late levels in New York trade Thursday. The greenback is higher against the yen, fetching Y91.30 from Y90.90, but is slightly lower against the pound at $1.4580 from $1.4570 in late U.S. trade.
Trade Friday is expected to be thin ahead of the three-day weekend for U.K. and U.S. markets and with no European data on offer, foreign exchange investors are likely look toward equities for direction. As the main European bourses are expected to open higher the risk rally may still have further to run.
With a sovereign debt crisis still very much a threat and the global economic recovery looking very vulnerable, the most that can be expected from Beijing is some tiny incremental move in policy just to keep the critics at bay.
This will probably take the form of a slight widening in the yuan's trading band against the dollar.
In the first instance, a wider band would provide scope for monetary tightening that would help address China's growing inflationary problems and slow the rally in property prices.
In the second, it would answer criticism from the U.S. and elsewhere that a cheap yuan is damaging their export growth.
There are two major reasons why Beijing is not about to revalue the yuan any more dramatically just now.
The recent fall in the euro has already undermined the yuan's competitiveness in European markets, which account for as much as 25% of Chinese exports.
With the euro widely expected to fall even more, China is hardly likely to accelerate the yuan's relative rise and damage exports even further.
Not only would this hurt China's own growth prospects but it would be bad news for global growth, which is already being downgraded because of greater fiscal austerity in the euro zone.
So the most that can be expected from the Peoples' Bank of China some time this summer is a minimal move that allows the yuan to fluctuate just a little bit more against its central peg against the dollar.
If nothing else, this should reduce calls from the U.S., as well as many emerging markets, for China to stop keeping the price of Chinese exports artificially low.
The recent fall in the euro has also triggered speculation that China will reduce its exposure to euro assets.
In recent years, the PBOC has pursued a policy of diversification of its new foreign exchange reserves, buying more euros rather than U.S. dollars.
This policy has been followed by many other central banks accumulating reserves as they acknowledged the growing importance of the euro and fears about the long-term strength of the dollar.
Given the euro's nearly 20% slide in value against the dollar since late last year, it isn't surprising that China, or in fact any other country, might review their policy.
However, any suggestion that China--which holds $2.5 trillion of reserves--is about to start moving out of the euro would only bring about the sort of sharp decline in the single currency that Wednesday's report in the Financial Times triggered.
Thus, selling the euro at this stage could well prove self-defeating, not only in terms of the value of reserves but also in terms of Chinese exports to Europe.
In the meantime, as Chinese officials have confirmed, the country's diversification policy remains unchanged. The central bank will continue buying, as it has in the past, as any shift would incur even more damage to an already fragile euro.
Overnight markets continued to be cheered by China's comments that rumors of diversification were groundless.
Global equity markets rallied hard with the Dow Jones Industrial Average gaining 2.9% and the Nikkei following up with a 1.3% gain Friday.
Commodity currencies surged with the Australian dollar adding some 3.5%, the Canadian dollar 2% and oil gaining over $3 to trade above $74 a barrel.
Around 0645 GMT the euro, which came within a whisker of a fresh four-year low Thursday, is trading some two cents higher around $1.2355, unchanged from late levels in New York trade Thursday. The greenback is higher against the yen, fetching Y91.30 from Y90.90, but is slightly lower against the pound at $1.4580 from $1.4570 in late U.S. trade.
Trade Friday is expected to be thin ahead of the three-day weekend for U.K. and U.S. markets and with no European data on offer, foreign exchange investors are likely look toward equities for direction. As the main European bourses are expected to open higher the risk rally may still have further to run.
- 28 May |
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