China's unappreciated yuan appreciation: The week's best "rising ¥" news reads -- China Boss update 6.04.21
Update
The week's best "rising ¥" news reads
This week saw a number of reports on China’s rising yuan which analysts say threatens to wreak havoc on the global economic recovery. The Wall Street journal said “China’s problem” is really about the weakening dollar, and Bloomberg and the South China Morning Post ran play-by-play coverage of whether and when Beijing would intervene to curb the yuan’s ascent. Spoiler alert: It did.
Powell’s Dollar, China’s Problem (Editorial Board, Wall Street Journal)
The Wall Street Journal’s Editorial Board was watching the weakening dollar’s effect on the Middle Kingdom closely. The paper’s editors wrote “[a] declining greenback creates new risk for the global recovery” and “is a natural consequence of Washington’s unprecedented spending blowouts in the past year.”
Editorial Board, WSJ:
Here’s what it means for China: Some yuan appreciation versus the dollar might help China contain a looming inflation problem, as it experiences the same rising commodity prices and supply-chain bottlenecks afflicting everyone else. There is also evidence heavily indebted Chinese companies have grabbed the opportunity to pay down dollar-denominated debts, too.
Those benefits come with risks. If a stronger currency leads to smaller yuan-denominated revenues for exporters, that could exacerbate the financial fragility of an economy in which public and private debt exceeds 300% of GDP. Beijing also worries that too rapid an appreciation could spark destabilizing capital inflows or outflows (the nature of China’s quasi-market economy makes it hard to predict which). Managing the fallout from the Fed’s weak-dollar policy could also expose China to trade retaliation from Washington.
Many of these dangers are Beijing’s fault, stemming from its credit-fueled policy mistakes over many years. But the U.S. has no interest in adding exchange-rate worries to the list of global economic problems.
Yuan’s Blockbuster Week Draws PBOC Attention, Appreciation Bets (Livia Yap and Tian Chen, Bloomberg)
Perennial tension exists between what Chinese leaders hope to achieve, policy-wise, and what they are willing to tolerate, politically. The latter often obstructs economic reforms, and Beijing’s efforts to back away from currency manipulation are no different. Although authorities recognize the geopolitical value of letting the yuan float, they seem to easily succumb to longstanding fears of chaos were the party-state to loosen monetary control. Here, Bloomberg indicates that the Chinese government had been keeping a close eye on the yuan’s rise in value. The day after this report was put to press, however, authorities raised reserve requirements for banks’ foreign exchange deposits (see SCMP read below).
Yap and Chen, Bloomberg:
With China’s economy rebounding from the pandemic and foreign funds piling into its equity and bond markets, the yuan surged past crucial levels that have held for the past three years. The advance is creating a momentum of its own, drawing in investors looking for an attractive yield play in a world of low rates. So far, the central bank has refrained from acting to slow yuan appreciation, though a statement issued late Thursday warned against one-way bets and predictions.
“The central bank is trying to downplay the market’s over-emphasis on the renminbi after two separate PBOC official speeches last week caught lots of attention,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. in Singapore. Still, “the embedded structural dollar weakness may remain supportive of renminbi in the medium term,” allowing to rise toward 6.25 by year end, he said.
While the daily dollar-yuan reference rate by the PBOC this week implied that it is comfortable with the recent appreciation, its latest statement suggested that policy makers are growing concerned about the increased focus on yuan strength. Traders will be watching Friday’s fixing at 9:15 a.m. Beijing time for further signaling.
China moves to slow yuan’s rise as concerns rise over hot money flows, asset bubbles (Karen Yeung, South China Morning Post)
Last Monday, according to SCMP, “China’s central bank said . . . it would raise the amount of money that financial institutions must set aside as reserves for their foreign exchange deposits.” The increase is expected to take effect on June 15. In reading the following compilation of official statements, you can almost feel the urgency of Chinese officials who, as authoritarian decision-makers, are accustomed to a great degree of control and are, simply, too risk-adverse to countenance even the milder effects of market volatility and, so, in the end, they maneuver to hold down the yuan.
Yeung, SCMP:
By requiring market participants to set aside a large amount of their foreign exchange holdings as reserves, the PBOC is reducing the market’s dollar liquidity and in turn limiting the decline in the dollar and the rise in the yuan.
Prior to Monday’s move, Chinese officials tried verbal intervention to halt the yuan’s ascent.
In the past week, a series of former and current Chinese officials warned against speculative yuan trading, showing discomfort with the recent rise of the Chinese currency amid concerns that asset bubbles are forming in the aftermath of the coronavirus pandemic.
Former PBOC official Sheng Songcheng said on Sunday the yuan was overbought against the dollar but the overshooting would not be sustained, according to an official Xinhua news agency report.
The Financial News, a PBOC-run publication, also said that yuan depreciation risks should not be ignored given prospects that the US Federal Reserve may soon begin to taper its loose monetary policy, and that there could be a redirection of supply chains as the global economy reopens.
Meanwhile Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission, called for tougher international oversight to stop major flows of hot money across borders to prevent the formation of asset bubbles, the bursting of which could cause a financial crisis.
Still, analysts told SCMP that the move “was likely to have only a marginal impact, causing a temporary pullback in the exchange rate rather than reversing its long term appreciation,” as the “fundamentals” that make the dollar weaker would continue to exist “in the next 12 months.” That could set a worrying trend of increasing prices for Chinese exports just when other Asian and South Asian countries, like Vietnam and Bangladesh, finish their vaccination programs and fully re-open their supply chains.
The yuan will keep rising. Here are 10 reasons why (David Marsh, Opinion, The Business Times, Singapore)
This read is from December 2020, but it’s great for additional insight. I don’t agree with all that Marsh thinks about China because I don’t think he fully appreciates the limitations that go along with China’s particular brand of authoritarianism - mainly, the party-state’s deep-seated fear of disorder that keeps its hold on the yuan tight. But I do think he makes some excellent points.
Marsh, Business Times:
IN THE months before the US presidential election, the general view took hold that, should Joe Biden win, one area of continuity with Donald Trump would be in policies on China. With the former vice-president moving into the White House on Jan 20, there will be tension, even confrontation, over China's assertive foreign policy, human rights, trade, technology and espionage.
But, based on early statements from both sides, the relationship between the two major world players will be more organised, less chaotic and more stable than under President Trump. Against this background, the factors behind yuan realpolitik look positive.
There are many imponderables, not least question marks over the stability of the Chinese financial system epitomised by the lack of full yuan convertibility, doubts over productivity growth and the huge build-up of debt. There will be plenty of bumps along the way. But here are 10 reasons why the Chinese currency's importance on the world stage - and its value - are likely to keep on rising in coming years.
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That’s it for today. It’s June 4th. Don’t forget to take a moment to remember that it was China’s most progressive leader, Deng Xiaoping, who turned the tanks on protesters in Tiananmen Square more than 30 years ago, today. It’s that “authoritarian fear of disorder” thing I referenced earlier. Turns even the best of ‘em into monsters.