China Currency Shift Provides Fuel For Doubters. By Katie Martin
No one seems to be celebrating after China dropped its currency peg to the dollar.
The shift is a big deal for conservative China. It is a vote of confidence in the global economy--a shift back to business as usual after the financial crisis prompted it to peg against the dollar once more in 2008.
It is a big olive branch to the U.S., which has been pressing for currency reform for years; a move that may help to deflect the risk of a full-scale trade war between the two super powers.
Granted, it is a modest move. It isn't a free-float or a big revaluation--the yuan can still shift by only 0.5% a day against the dollar. The People's Bank of China has made it clear that it doesn't intend to stomach a rapid rise in the yuan, and indeed it allowed the currency to fall, not rise, against the dollar Tuesday. Still, it is broadly seen as a step in the right direction.
And yet no one expects the rally seen in risky currencies in the aftermath of China's shift to last. Indeed, it is already reversing. And many say the move could end up making relations with the U.S. worse, not better.
One concern is China's motivation here. Did its central-bank officials wake up one day and think that maybe the highly critical U.S. politicians were right all along, that China should let the yuan climb in an effort to help U.S. manufacturers?
Most analysts doubt it. Instead, many see cynical motives. In particular, leaders from the Group of 20 industrial and developing countries are due to meet next weekend, and China may have wanted to deflect any fire over its yuan-management program with a tiny, symbolic move, pessimists point out.
Now China can, with a straight face, insist that it is working on currency imbalances. It has started the process, now patience is needed from elsewhere.
Many doubt it will even work.
"What does China produce? It's mostly low-grade stuff that will never be produced in the U.S. just because of a shift in the exchange rate," noted Lutz Karpowitz, a currencies analyst at Commerzbank AG in Frankfurt.
China will remain a low-cost exporter even with a good deal more strength in its currency. If anything, the U.S. may now start importing more from other exporting hubs within Asia.
Crucially, many doubt that it will even amount to much.
Unless China allows the yuan to climb by the maximum possible daily amount on a regular basis, then you can forget about this being seen as a positive step toward rebalancing the global economy.
"If anything, the risk is that China is soon criticized for moving too slowly, and that trade tensions could escalate again," said Julian Jessop, chief international economist at Capital Economics in London.
And consider this: the yuan could end up falling just as often as it rises.
"When many international observers talk about flexibility, they mean the flexibility to allow the yuan to rise," said the analysts at Brown Brothers Harriman. "Chinese officials have signaled a different meaning--a better two-way market. Some Chinese officials have intimated the yuan may not only rise but decline as well."
Tuesday's official fixing rate for the dollar was CNY6.7980, close to the level struck in over-the-counter trading Monday as the yuan soared to a five-year high. However, the dollar later recovered to CNY6.8215, with local traders citing heavy buying by Chinese banks. That takes the rate almost back to the official fixing rate from Monday, and indeed from the previous Friday, of CNY6.8275.
"I interpret today's market moves as that the PBOC doesn't want the yuan to appreciate by 0.5% every day," said Tim Condon, an economist at ING in Singapore, referring to the yuan's daily trading limit on either side of the central parity level.
"There would be no doubt that the (yuan) would move to the strong side of the band if the market is left on its own," Condon said, adding that the yuan's unexpected fall was probably the PBOC's work via "agent banks."
In early European trading hours Tuesday, the euro was a shade lower at $1.2314 from $1.2320 late in New York Monday, according to trading system EBS. The 16-country currency had sunk from above $1.24 Monday as the post-depegging euphoria waned and Fitch Ratings cut French bank BNP Paribas SA's long-term debt rating to AA- from AA.
The dollar was at Y90.82 against the yen, down a little from Y91.04, while the euro was at Y111.82 from Y112.26. The U.K. pound was at $1.4738 from $1.4754.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 85.97 from 85.953.
The shift is a big deal for conservative China. It is a vote of confidence in the global economy--a shift back to business as usual after the financial crisis prompted it to peg against the dollar once more in 2008.
It is a big olive branch to the U.S., which has been pressing for currency reform for years; a move that may help to deflect the risk of a full-scale trade war between the two super powers.
Granted, it is a modest move. It isn't a free-float or a big revaluation--the yuan can still shift by only 0.5% a day against the dollar. The People's Bank of China has made it clear that it doesn't intend to stomach a rapid rise in the yuan, and indeed it allowed the currency to fall, not rise, against the dollar Tuesday. Still, it is broadly seen as a step in the right direction.
And yet no one expects the rally seen in risky currencies in the aftermath of China's shift to last. Indeed, it is already reversing. And many say the move could end up making relations with the U.S. worse, not better.
One concern is China's motivation here. Did its central-bank officials wake up one day and think that maybe the highly critical U.S. politicians were right all along, that China should let the yuan climb in an effort to help U.S. manufacturers?
Most analysts doubt it. Instead, many see cynical motives. In particular, leaders from the Group of 20 industrial and developing countries are due to meet next weekend, and China may have wanted to deflect any fire over its yuan-management program with a tiny, symbolic move, pessimists point out.
Now China can, with a straight face, insist that it is working on currency imbalances. It has started the process, now patience is needed from elsewhere.
Many doubt it will even work.
"What does China produce? It's mostly low-grade stuff that will never be produced in the U.S. just because of a shift in the exchange rate," noted Lutz Karpowitz, a currencies analyst at Commerzbank AG in Frankfurt.
China will remain a low-cost exporter even with a good deal more strength in its currency. If anything, the U.S. may now start importing more from other exporting hubs within Asia.
Crucially, many doubt that it will even amount to much.
Unless China allows the yuan to climb by the maximum possible daily amount on a regular basis, then you can forget about this being seen as a positive step toward rebalancing the global economy.
"If anything, the risk is that China is soon criticized for moving too slowly, and that trade tensions could escalate again," said Julian Jessop, chief international economist at Capital Economics in London.
And consider this: the yuan could end up falling just as often as it rises.
"When many international observers talk about flexibility, they mean the flexibility to allow the yuan to rise," said the analysts at Brown Brothers Harriman. "Chinese officials have signaled a different meaning--a better two-way market. Some Chinese officials have intimated the yuan may not only rise but decline as well."
Tuesday's official fixing rate for the dollar was CNY6.7980, close to the level struck in over-the-counter trading Monday as the yuan soared to a five-year high. However, the dollar later recovered to CNY6.8215, with local traders citing heavy buying by Chinese banks. That takes the rate almost back to the official fixing rate from Monday, and indeed from the previous Friday, of CNY6.8275.
"I interpret today's market moves as that the PBOC doesn't want the yuan to appreciate by 0.5% every day," said Tim Condon, an economist at ING in Singapore, referring to the yuan's daily trading limit on either side of the central parity level.
"There would be no doubt that the (yuan) would move to the strong side of the band if the market is left on its own," Condon said, adding that the yuan's unexpected fall was probably the PBOC's work via "agent banks."
In early European trading hours Tuesday, the euro was a shade lower at $1.2314 from $1.2320 late in New York Monday, according to trading system EBS. The 16-country currency had sunk from above $1.24 Monday as the post-depegging euphoria waned and Fitch Ratings cut French bank BNP Paribas SA's long-term debt rating to AA- from AA.
The dollar was at Y90.82 against the yen, down a little from Y91.04, while the euro was at Y111.82 from Y112.26. The U.K. pound was at $1.4738 from $1.4754.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 85.97 from 85.953.
- 22 June |
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