By BLOOMBERG
The yuan, which has fallen 5% since China’s central bank devalued the currency in August, probably needs to fall an additional 14% if the nation’s economy is to see any real benefits.
A decline to 7.7 per US dollar, from about 6.6, is needed to boost gross domestic product expansion by 0.7 percentage point, according to estimates by Bloomberg Intelligence Economics. The move, a scenario which none of the analysts in Bloomberg surveys expect, would lead to US$670 billion (RM2.9 trillion) in capital outflows.
The trick for Chinese officials is to manage the currency lower without sparking a mass exodus of capital from the country. The drop in China’s exports is mainly the result of sluggish global demand, and a collapse of the yuan would only increases the risk of competitive devaluations in neighbouring countries – creating a so-called currency war.
“They don’t want an excessive devaluation,” Sacha Tihanyi, senior emerging markets strategist at Toronto Dominion Bank in New York, said by phone on Thursday. “I don’t think they’re trying to achieve some kind of export advantage through currency devaluation.”
The yuan slid to a five-year low of 6.5956 per US dollar in Shanghai on Thursday after the central bank cut the fixing, extending its decline over the past year to 5.7%.
The People’s Bank of China (PBOC) halted an eight-day run of cuts to its reference rate for the currency on Friday and the offshore exchange rate strengthened for a second day, maintaining the gap with the onshore level at 1.4%. It widened to a record 2.9% on Thursday before tightening amid suspected intervention.
Exports decline
China’s exports fell for a fifth month in November, the customs administration said at the end of last year. Gross domestic product growth will slow from 6.9% in 2015 to 6.5% this year, according to a Bloomberg survey.
To lift export growth by 10% this year would require a 13% drop in the yuan on a trade-weighted basis, the historical relationship between the two suggests, according to Bloomberg Intelligence analysts Fielding Chen and Tom Orlik. That implies that the yuan needs to decline to about 7.7 per US dollar, which would be the lowest since 2007. Option traders assigned a 13% probability of reaching it this year.
Only one analyst among 64 surveyed by Bloomberg expects the yuan to weaken beyond 7 per US dollar this year. Analysts at Rabobank Group of the Netherlands are the most bearish, predicting the yuan will weaken to 7.6 per US dollar by the end of December. That compares with the median forecast of 6.65 per US dollar.
Mixed signals
The People’s Bank of China has sent mixed signals about the goals of its currency policy. The authorities have repeatedly pledged to keep the yuan stable, drawing down a record US$513 billion from foreign reserves last year to shore up the exchange rate.
At the same time, the PBOC set its reference rate at unexpectedly weak levels this week, raising speculation that it’s become more tolerant of depreciation and rattling global markets.
Analysts at JPMorgan Chase & Co. lowered their year-end yuan forecasts Thursday to 6.9 per US dollar, from 6.7, saying the weaker fixings were a “clear confirmation of a shift in the mindset of Chinese authorities” in favour of a weaker yuan versus the US dollar.
Economic improvements
The currency decline is at odds with recent signs of economic stability. Monthly indicators due Jan 19 are poised to show continued gains in retail sales, and some acceleration in industrial output from November to December, according to Goldman Sachs Group Inc.
Evidence also indicates that house prices are steadying, metals prices have picked up from historical lows and demand for credit is reemerging.
While exports are slowing, they’re more or less in line with other nations as the global trade stagnates. Overseas shipment in China fell 6.8% in November, compared with a 6.3% rop in Taiwan and a 4.8% decline in South Korea.
If anything, Chinese exporters are edging out their competitors, hardly a sign of currency overvaluation. The country’s share in global exports surged to about 14% in July, from 8.7% in January 2010, according to data compiled by Bloomberg.
Further depreciation fuels expectations of more weakness and capital outflows, according to Chris Turner, London-based head of currency strategy at ING Groep NV. Outflows amounted to almost US$1 trillion in the year through November, according to Bloomberg data.
“The PBOC want to keep it ’basically stable’ against a basket of currencies,” said Turner. Losing control of the yuan “could trigger more capital outflows” and that would be their main concern, he said.
— By Ye Xie, Lyubov Pronina & Andrea Wong
You must be logged in to post a comment.