REUTERS/Nicky Loh
THE PEG IS DEAD Beijing’s message is clear. But predictability and transparency are not hallmarks of China policy, so financial markets will tread cautiously. Reuters looks at what’s in store for the yuan
JUNE 2010
REUTERS YUAN WATCH
YUAN TO RISE 2.4% VS DOLLAR BY END OF YEAR - REUTERS POLL BEIJING, June 21 - China will be true to its word and prevent a sharp rise in the newly unshackled yuan over the next year, according to a Reuters poll conducted on Monday. The median forecast of 33 economists is that the yuan will end 2010 at 6.67 per dollar. That would mark a rise of 2.4 percent from the level that obtained before Beijing said on Saturday that it would let the currency start moving flexibly once again after pegging it near 6.83 for 23 months during the global financial crisis. The projection is close to the appreciation implied in the offshore non-deliverable forwards market, where the six-month tenor was quoted at a midpoint of 6.7025 at 0725 GMT. Looking further ahead, the median forecast of 29 economists is for the yuan to creep up to 6.58 per dollar by the end of June 2011, compared with a 12-month NDF midpoint of 6.6275. The survey points to a rise in the yuan's value against the dollar of 3.8 percent over the next year. The limited appreciation reflected in the poll results chimes with the central bank's emphasis that the rise in the yuan, also known as the renminbi (RMB), would be gradual. "With the balance-of-payments account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist," the People's Bank of China said in a statement on Saturday. By mid-afternoon, the yuan had gained 0.35 percent from its opening level as the PBOC allowed traders to drive the currency higher. But the Reuters poll suggests such a rapid rate of climb will not last long. "Following this weekend's statement, the spot rate is likely to resume appreciation, but the pace will be very gradual," Qian Wang and Grace Ng, economists at J.P. Morgan, said. "The pace of RMB/USD appreciation will likely be accelerated as the Chinese government gains more confidence in the resilience of the global economic recovery and a soft-landing of the domestic economy. We continue to expect RMB/USD to reach 6.6 by end of this year," they added in a note to clients. (Reporting by Beijing newsroom; Writing by Alan Wheatley; Editing by Simon Rabinovitch)
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WHERE NEXT FOR THE YUAN? BEIJING, June 20 - China has vowed to resume currency reform by increasing the yuan's flexibility, indicating that it will end a 23-month-old peg to the dollar. But it has said little about what this means in practice. Below are scenarios for how Beijing will manage the exchange rate in the coming weeks. GRADUAL APPRECIATION * Probability: Most likely In its announcement, the central bank said that exchange rate reform would be gradual, ruling out both major appreciation and a one-off revaluation.
In the past, the yuan rarely fluctuated more than 0.1 percent in intraday trading, even though the trading band permitted a rise or fall of 0.5 percent against the dollar each day. Beijing will be more determined to increase volatility this time, to discourage the hot-money inflows that accompanied its steady appreciation from 2005 to 2008. Li Daokui, an academic adviser to the central bank, said that a sustained fall in the euro against the dollar could also lead to a decline in the yuan against the dollar. In other words, on days when the dollar is falling globally, Beijing may push the yuan up slightly. When the dollar is strong, the Chinese currency may pare these gains.
The strength of China's economic recovery gave policymakers the confidence to end the peg that had helped cushion the economy from the global financial crisis, but they remain worried that external demand is still not on a solid footing, especially with European debt worries in the background. Nevertheless, China needs to allow the yuan to rise, even if it is in tiny steps, to prove that it is serious in its commitment to make the currency more flexible. U.S. Treasury Secretary Timothy Geithner stressed that Beijing's actions would speak louder than words. Under this scenario, the central bank could use its setting of the yuan's daily reference rate to nudge the exchange rate up by modest amounts each day, for example from 6.8260 per dollar to 6.8250 per dollar, for a few months until the global economic picture becomes clearer. Any rally in global equity markets and yuan forwards may fade out quickly and even reverse as disappointment sets in that China's reform is not more radical. TWO-WAY VOLATILITY * Probability: Possible In explaining how yuan reform will proceed, the central bank said it will increase the exchange rate's flexibility and ensure that it could both rise and fall depending on market conditions. For a long time, China has wanted to introduce more two-way risk into the exchange rate. In theory, traders will no longer be able to assume that the yuan can only move in one direction -- up.
But marked depreciation of the yuan would infuriate lawmakers in Washington, auguring poorly for a trade dispute. And given the widespread belief among investors that the yuan is undervalued, it will be hard to counter the view that the currency remains a one-way bet from a longer-term perspective, even if the day-to-day ride may be bumpier. BIG EARLY GAINS * Probability: Unlikely Viewed abstractly, there is a strong rationale for allowing a major appreciation of the yuan right out of the starting blocks. Speculators may be tempted to pour money into China to benefit from a stronger yuan, but if Beijing moves the yuan up quickly enough, many may conclude that they have missed the best opportunity and so stay away. Similarly, hawks in the U.S. Congress are ready to pounce if China only tip-toes toward a stronger yuan.
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But the government will be loath to push the yuan up too aggressively. Politically, it would look like an embarrassing about-face, having sworn off a one-off appreciation. And concerns about the health of the global economy are real enough to dissuade Beijing from making a move that might prove too disruptive. STATUS QUO * Probability: Least likely China's announcement that it was resuming yuan reform seemed calculated to disarm critics of its currency regime before a Group of 20 summit this coming weekend in Canada. If Chinese leaders are risk-takers -- and nearly all evidence suggests they are not -- then they might gamble that words alone will be powerful enough.
of the broad strength of the U.S. currency. But continuing the peg would infuriate U.S. lawmakers and strip China of any goodwill it earns from its promise to make the yuan more flexible.
Keeping the yuan locked at about 6.83 to the dollar would please hard-liners at home who have accused Beijing of capitulating to foreign pressure. And there is an economic justification for the status quo. The yuan's exchange rate against a basket of currencies has risen strongly in recent months even as it has remained pegged to the dollar, simply because
The announcement alone implies that China's top leaders have forged a consensus to break the peg launched in July 2008. Any maintenance of it now would be a massive surprise. (Reporting by Aileen Wang, Zhou Xin and Simon Rabinovitch: Editing by Neil Fullick)
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YUAN-DOLLAR DOESN'T DRIVE CHINESE REBALANCING By Wei Gu HONG KONG, June 21 - Who will be a bigger driver of global trade rebalancing - the People's Bank of China or the country's migrant workers? The PBoC guides the yuan exchange rate, which U.S. politicians and investors are fixated on. But other factors, including labour costs, are probably doing more to increase the cost of exports from China. China's yuan reforms got off to a slow start on Monday. The central bank set the daily mid-point for yuan trading at Friday's level. The currency strengthened slightly thereafter, rising by about a third of a percent in the afternoon to its strongest level since late 2008. But the dollar exchange rate is only one number -- and maybe not the right one to watch. The People's Bank of China watches closely the so-called "effective exchange rate", tracked by the Bank for International Settlements. That is measures of relative costs among different countries. This rate rose 4.8 percent from November 2009 to this May, and 3.4 percent in May alone, according to the BIS. By that measure, Chinese competitiveness is at its worst level since 1994, except for the eight crisis-racked months after October 2008. Labour and energy costs are making Chinese goods more expensive. Fourteen provinces have already raised their minimum wages by 20 percent this year, not to mention high-profile pay hikes at companies such as Foxconn and Honda. Chinese gasoline prices, meanwhile, are now 60 percent higher than in the United States, having been roughly equal in 2008. Higher costs are already making Chinese goods less attractive to both foreign and domestic buyers. China posted its first monthly trade deficit in six years in April and only narrowly returned to trade surplus in May. The euro crisis only partly explains the shift. The nominal yuan exchange rate will continue to be a focus for China's trade partners. It has risen 20 percent against the dollar since 2005, and may have further to go. Yet labour costs have doubled during the same period, taking official data on rural income levels as a guide. That should be a much more powerful force for shrinking China's trade surplus.
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AFTER CHINA’S YUAN WORDS, WORLD NOW AWAITS DEEDS By Alan Wheatley, China Economics Editor BEIJING, June 20 - Ambassadors to China are only occasionally summoned by the foreign ministry to be told that an announcement of international significance is due. That was the case at 6 p.m. on Saturday. Within the hour, China had duly ditched the yuan's 23-month-old peg to the dollar that has been a lightning rod for criticism that Beijing has been gaining an unfair trade advantage during the global downturn by artificially holding down its currency.
But there are several reasons to assume that gradualism will be the initial watchword: Firstly, the economics. In its statement, the People's Bank of China noted -- correctly -- that its external surpluses have been falling. As such, it said, "the basis for large-scale appreciation of the RMB exchange rate does not exist." The debt woes of the euro zone, China's biggest trading part-
Despite the disruption to their evening plans, the envoys did not go away disappointed. This was big news. But the potential for political and market disappointment in the months to come remains considerable. For the consensus among Chinawatchers is that the central bank will initially be cautious about taking advantage of the permission it has been granted to revert to the flexibility it enjoyed before the yuan was effectively repegged near 6.83 per dollar in mid-2008 to provide stability during the global crisis. In the three years following an initial 2.1 percent revaluation of the yuan on July 21, 2005, the currency gained a further 19 percent. But in those first remaining months of 2005, the appreciation was just 0.56 percent. A repeat of that snail's pace of climb will infuriate U.S. lawmakers who, while welcoming China's policy shift, want to see words followed by deeds. No one knows what will happen in the days and weeks to come. Predictability and transparency are not hallmarks of China's policy. As Qing Wang, Morgan Stanley's chief China economist, put it in a note: "The best way to characterise this policy move is as a 'switch to the pre-crisis regime'. Anything that has happened under the previous regime can happen now going forward."
ner, will merely reinforce this judgment. Second, the politics. The decision was so important, according to two informed sources, that it was taken by the country's highest decisionmaking body, the nine-member Standing Committee of the ruling Communist Party's Politburo. A stronger currency is in China's interest because it will add momentum to domestic demand. This dovetails with the Party's strategy to spread wealth, reduce yawning income inequalities and reduce reliance on investment-heavy export industries. A firmer yuan will also help cap incipient inflationary pressures. Letting the yuan rise should also cool anti-China sentiment in the U.S. Congress, for now at least, and fend off the risk of China's being declared a currency manipulator by the U.S. Treasury. Those are all important pluses for China. Still, the shift could expose China's leaders to criticism by nationalists that they have acted under external duress, a perceived loss of face that would be compounded if they were
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then to let the yuan rise at a rapid rate of knots. "The message to the outside world is: don't pressure us," said Li Daokui, an academic adviser to the monetary policy committee of the People's Bank of China, the central bank. Another economist with direct knowledge of the workings of the central bank's committee agreed. "You've backed us into a corner this time. Don't do it again," would be the thrust of what President Hu Jintao tells the Group of 20 summit in Toronto at the end of this week, he said. FOCUS STILL ON DOLLAR This person, who declined to be identified because of the sensitivity of the issue, said the PBOC had held serious discussions about depegging the yuan as far back as December. The central bank wanted more autonomy in monetary policy, which was partly hostage to the Federal Reserve's stance due to the dollar link, but could not overcome opposition from proexport lobbies.
He, too, said China was likely to focus almost exclusively on the yuan exchange rate against the dollar, despite lip service to managing the exchange rate with reference to a basket of currencies. NO SALVATION FOR GLOBAL IMBALANCES China's shift is an important ingredient in helping to rebalance its economy and hence the global economy. So is the round of big pay increases in southern China. Both increase domestic purchasing power. But the macroeconomic forces that determine savings and investment rates, and hence a country's external balance, are complex and slow-burning. A rising yuan, by itself, will be no more of a game changer for global imbalances today than it was from 2005-2008. The ageing of China's working population from mid-decade, which will erode its savings rate, will be more of a watershed. "For the near term, the rate of appreciation will be slow enough as to have no material impact on Chinese exports," Rothman wrote.
He said the PBOC was likely to revert to a crawling peg against the dollar -- as was the case from July 2005-2008 -- because the concept of managing the yuan against a basket of currencies was too complicated to convey to politicians. Finally, he said appreciation was likely to resume eventually at the same pace as prior to mid-2008, in other words about 7 percent a year. "Some years it could be 8 percent, other years it might be 5 percent. But you can forget a 30 percent increase. We haven't forgotten what happened to Japan," this insider said. China blames the long years of slow growth and deflation suffered by Japan on its acquiescence, under foreign pressure, to a sharp rise in the yen as part of the 1985 Plaza accord. Andy Rothman, a strategist at brokerage CLSA in Shanghai, broadly shared this analysis. He said he expected appreciation of about only 0.2 percent a month until Europe stabilises. "Then look for the appreciation to return to the 5-7 percent pace of the 2005-2007 period," Rothman said in a note.
And, as U.S.-China Business Council President John Frisbie said, a change in the yuan may not have much of an impact on China's allimportant trade balance with the United States. "On the import side, much of what we import from China is stuff that we imported from elsewhere before; if we didn't import it from China, we'd likely just import it from somewhere else," he said in a statement. Moreover, the group's members have never cited the yuan's exchange rate as an impediment to exporting to China. "Macroeconomics says an appreciating RMB would likely have some effect on trade flows, but the reality is probably not very much," Frisbie said. (Editing by Neil Fullick)
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CHINA FX MOVE ONLY A MINOR AID TO G20 REBALANCING By Brian Love PARIS, June 21 - G20 leaders are likely to remain divided over how to balance the global economy at their summit in Canada this weekend, despite China's decision to let its currency trade more freely. Beijing's abolition of the yuan's 23-monthold peg against the U.S. dollar, announced on Saturday, may partially ease tensions at the meeting by clearing the way for appreciation of the Chinese currency in the long term. But China still seems unlikely to let the yuan appreciate nearly as fast as major trading partners would like. This means any quick, sustained reduction of the Chinese trade surplus, which was $19.5 billion in May, is probably not on the cards. "Investors should not get carried away as China is not ready to let the yuan rise," said Lena Komileva, London-based economist at Tullet Prebon brokerage. "A more flexible yuan does not necessarily mean a stronger yuan against the U.S. dollar or the euro." And to the extent that tensions dissipate over China's trade policy, they may become more acute in other areas, as governments focus on the different speeds at which countries are winding down fiscal stimulus for their economies. "We can expect more sharp disagreements between the U.S. and Europe, papered over with the common call for 'measures aimed at ensuring fiscal sustainability in a growthenhancing way'," said Marco Annunziata, chief economist at UniCredit bank. CHINA Rebalancing the global economy, by reducing dangerous differences between regions in trade flows and savings, has been a top goal of the Group of Twenty major nations since the global financial crisis of 2007-2009. Stock markets around the world rose on Monday because China's move on the yuan could eventually help correct a major source of trade imbalances, spreading the benefits of
surging Chinese consumer demand more evenly around the world. Annunziata described Beijing's announcement days before the G20 summit as an "extremely clever" diplomatic ploy, because it would "wrongfoot the rest of the G20, deflating all the China-bashing enthusiasm". But for the foreseeable future, China appears unlikely to let the yuan rise much further. It stressed at the weekend that "the basis for large-scale appreciation of the RMB exchange rate does not exist", and with Chinese labour and energy costs rising, Beijing will be reluctant to permit any currency move that could add to pressure on its exporters. One-year non-deliverable forwards on Monday implied yuan
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appreciation against the dollar of under 3 percent over the next 12 months -not nearly enough, economists and businessmen say, to make a big difference to trade flows during that period. So although G20 leaders may praise China publicly at their summit, in the hope of securing further cooperation on exchange rates, they are unlikely in private to obtain any commitment to an extended, sharp appreciation of the yuan. AUSTERITY Meanwhile, tensions over austerity measures in G20 countries may increase. After last month's costly bailout of Greece, Germany has been pushing for the rest of the euro zone to implement deep public spending cuts to bring their budget deficits under control and reassure the bond markets. Washington worries that Germany is slamming its foot too hard on the brakes, which could potentially push Europe back into recession and hurt the global economic recovery.
G20 FRAMEWORK At a meeting in Scotland last November, G20 finance ministers and central bankers laid out a timeline for the group to work towards rebalancing the global economy.
In a letter released last week, U.S. President Barack Obama said public finance problems should be addressed in the medium term -- implying they should not be the focus now.
At this year's June summit, G20 leaders were to discuss and agree on "a basket of policy options", which would be prepared with the help of the International Monetary Fund, the World Bank and other international organisations.
Obama also said he was concerned to see some countries with large trade surpluses relying too much on exports and too little on domestic consumption -- another apparent reference to Germany, which has been criticised for not doing enough to import goods from weak south European economies.
Leaders are not expected this weekend to agree on any fresh measures that countries would take, however. What is likely to materialise in Canada at best is a list of economic reforms that each country in the G20 is pursuing, said an official source involved in preparations for the summit.
German Chancellor Angela Merkel flatly rebuffed Obama on Saturday, saying Europe would push for a swift exit from fiscal stimulus programmes and a focus on budget consolidation at the G20 summit. "European participants are of the opinion that this is urgently necessary to prevent such crises from happening again in the future," she said. The relatively loose U.S. approach to fiscal policy may also come in for criticism once again from China, which is heavily exposed to market jitters about U.S. government finances because of its big investment in U.S. Treasuries.
This list, which would include structural reforms such as changes to pension or labour market rules, will help countries discuss the impact of their actions on the global economy, said the source, speaking on condition of anonymity. But it is not certain that the leaders will make the list public, because China and Saudi Arabia among others do not want to become subject to public peer pressure, the source said, adding that there were "low expectations" for the meeting. Under the G20's timeline, the group's leaders will discuss and agree on more specific policy recommendations at a summit in November this year. (Editing by Andrew Torchia)
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YUAN DEPEGGING LONG-TERM POSITIVE FOR CHINA STOCKS By Lu Jianxin and Edmund Klamann SHANGHAI, June 20 - China's decision to end the yuan's nearly two-year peg against the dollar will boost its stock market heavyweights, as it heralds a long-term yuan appreciation based on robust productivity growth and aids an economic adjustment towards less reliance on exports. All major sectors in China's stock market -- from airlines and banks to property and investment firms -- are set to gain in the short or long term.
The yuan reform could therefore be a pleasant surprise for foreign firms, such as Standard Chartered Bank, which plans to tie up with Agricultural Bank of China as China's thirdlargest bank prepares for an initial public equity offer in Shanghai and Hong Kong this month. Other winning sectors include heavy importers of raw materials, such as paper makers, and investment firms, which will get a boost from government moves to boost domestic consumption to compensate for the smaller portion of exports in the economy.
Assets of Chinese companies, almost exclusively denominated in the yuan, stand to appreciate along with the value of the currency. Exporters will be the main losers as they will find it more difficult to sell outside China. But that may not be bad news for the economy as Beijing adjusts its economic mix to become less reliant on exports, which typically accounted for two-thirds of gross domestic product until the peak of the global financial crisis in 2008. Exporters are no longer the mainstream stock market sector and the impact of losses in such stocks will have only a limited impact on the overall market. "The yuan's appreciation is an indisputable trend in the long run, and it will be a great boost to China's stock market by helping to improve China's economic structure," said Cao Xuefeng, senior analyst at Western Securities in Chengdu. "Weak global economies and China's rising costs of labour mean China will no longer be able to rely on exports as its engine for growth. Consequently, domestically focused companies, such as banks and investment firms, will be favoured." Shares in China's top three airlines -- Air China, China Eastern and China Southern -- are expected to rise in the short term due to cost reductions, as their main operating costs are aircraft purchases overseas. Banks, such as Industrial and Commercial Bank of China, the world's biggest bank by assets, are seen rising in the medium term as their huge volume of yuan assets will appreciate in line with the rise in the currency. Land and property stocks will benefit from expectations of yuan appreciation in the long run.
But the boost to the stock market will likely be gradual, as China will control the pace of appreciation in the near term to deter speculative "hot money" betting on the yuan's rise. The Chinese stock market's benchmark Shanghai Composite, which has moved in a narrow range between 2,500 and 2,600 points since the start of this month, may not be able to break out of that band soon. Sentiment has been weakened by official steps to cool the property market and worries that the euro zone crisis will slow the economic recovery. "The initial impact of the yuan reform will be limited as everybody in this market knows the process will be gradual," said Qian Qimin, analyst at Shenyin & Wanguo Securities in Shanghai. “The market will largely move in line with developments in other factors, such as the government’s property cooling steps, until yuan appreciation has reached a degree where it has a big enough impact on the overall economy.”
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U.S. LAWMAKERS NOT READY TO LET CHINA OFF THE HOOK By Doug Palmer and Paul Eckert WASHINGTON, June 20 - China’s signal that it will ease its currency’s 23-month-old peg to the dollar will spare the country from U.S. lawmakers’ wrath only if it opens the door to significant upward movement in the yuan. Without quick follow-up by China to its terse announcement on Saturday, Democrats and Republicans eager to show voters they are looking out for U.S. jobs before congressional elections in November will renew a drive to punish China for “currency manipulation.” U.S. President Barack Obama could still formally label China as a currency manipulator that suppresses the value of its yuan for unfair trade advantages and the United States could treat China’s currency as a subsidy warranting U.S. duties on more Chinese imports. Beijing’s new currency regime does little to stop efforts in the U.S. Congress to slap duties on Chinese imports, although time might be running out for lawmakers restricted by a busy agenda that includes a major reform of financial regulations and perhaps an energy bill. Many legislators will start campaigning around September for the elections in November. Just days before leaders of the
Group of 20 major developed and developing nations meet in Toronto, China’s central bank said it would gradually make the yuan’s exchange rate more flexible, in a possible return to policies it pursued from 2005 to 2008. But Beijing all but ruled out a one-off revaluation or major appreciation sought by critics such as Democratic Senator Charles Schumer, leader of a bipartisan group of lawmakers threatening to pass legislation to prod China to move. Congress and the U.S. Treasury Department should hold fire and see how China implements the policy and, critically, how Beijing responds to any yuan rise in financial markets, said a prominent critic of Chinese currency policies. “If they let the rate start going up on a one-shot basis, that is significant, or look like letting it go up consistently -- by say a percent or so a month. Either of those should be enough for the Treasury or the Congress to say ‘OK, this is now moving in the right direction,’” said C. Fred Bergsten, head of the Peterson Institute for International Economics. “But if this is just a statement of principle and nothing much happens for a couple weeks or a couple months, then you have to resume the pressure.” China said on Sunday it will keep the yuan’s exchange rate at
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a basically stable level, prompting criticism from Schumer, the main hawk on China in Congress. “Just a day after there was much hoopla about the Chinese finally changing their policy, they are already backing off,” Schumer said, calling for “strong legislation” by Congress. China has held the yuan at roughly 6.83 to the dollar since July 2008 in an attempt to insulate the fastest-growing major economy from the ravages of the global financial crisis. For the three years before that, it loosened the peg and gradually let the yuan rise about 21 percent in value, which took the steam out of anger in Congress, although many lawmakers and manufacturers were upset it did not rise more. Sander Levin, chairman of the House of Representatives Ways and Means Committee, indicated Congress would not be mollified if China only tinkered with its exchange rate. “We have seen actions like this before and it is clear that China did not allow enough appreciation the last time it adopted a policy like this one, from 2005 to 2008,” he said. Many Western economists estimate the yuan is still undervalued by 25 percent to 40 percent, giving Chinese companies a huge price advantage in international trade. A U.S. manufacturing group that blames China’s currency for the loss of more than a million jobs said its members still want Congress to keep up the pressure on China. “Unless the move is rapid and significant, China’s announcement is nothing more than a cynical ploy ahead of the G20 and in the wake of mounting congressional pressure,” said Scott Paul, executive director of the Alliance for American Manufacturing. BRIEF COOLING-OFF PERIOD Anger about the exchange rate has coalesced behind a bill advanced by Schumer in the Senate and others in the House that would require the Commerce Department to treat currencies seen as undervalued as a subsidy so that firms could seek duties against them. The bill is a much milder version of legislation Schumer and colleagues sponsored several years ago that would have hit all Chinese goods with a 27.5 percent tariff. The latest bill would probably add to the 3 percent of U.S.
imports from China already covered with countervailing or anti-dumping duties. Chinese leaders now have put the onus on Obama and Treasury Secretary Timothy Geithner to gauge if they can credibly tell Congress that Beijing is not manipulating its currency. Obama complained loudly about Chinese currency manipulation during his 2008 presidential campaign but resisted labeling Beijing as a currency manipulator in two semi-annual Treasury reports issued during the peak of the global crisis. As the world economy began to stabilize, U.S. complaints about China’s exchange rate policies resurfaced. Geithner postponed the Obama administration’s third review of China’s currency practices, which was due on April 15, in effect giving Beijing until the G20 leaders’ meeting to act. Schumer and like-minded lawmakers are also pressing the Commerce Department to begin slapping countervailing duties on some Chinese goods even without new legislation. In two cases involving coated paper and an aluminum product, U.S. officials are weighing arguments that China’s undervalued currency is itself a trade subsidy. Raghuram Rajan, economics professor at the University of Chicago and former chief economist at the International Monetary Fund, said Beijing’s announcement “will allow both China and the U.S. to cool off before either side does something to precipitate a trade war.” But U.S. politicians do not want to be seen as weak on China before the congressional elections in November. Even if Washington gives China a pass in the delayed currency manipulation report, now expected by early July, the next semi-annual report is due on Oct. 15, just weeks before election day.
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CHINA MOVE LIKE HISTORY IN SLOW-MOTION By Jim Saft, Reuters columnist HUNTSVILLE, Ala., June 22 - Asked about 175 years after the fact what he made of the French Revolution, Chinese Premier Zhou Enlai is said to have thought for a moment and concluded: "It is too soon to tell." Tell a U.S Congressman up for reelection or an unemployed auto parts worker in Ohio the same thing about China's new policy to give the yuan more latitude in how it trades against the dollar and, once you've picked yourself up off the ground, you'll have a different answer. China on Saturday said it would end the yuan's currency peg to the dollar, allowing it to trade more freely. It also made clear that no big move was forthcoming, preparing the way instead for "gradual" appreciation. From a Zhou Enlai-like Olympian perspective this is a move in the right direction and, probably, helps to set the stage for a slow-moving but profound transformation in China's economy and how it interacts with the rest of the world. This is positive on many levels; it spreads the effects of Chinese growth more widely, it helps, at least a little, to rebalance global trade and, though they won't be thankful for it, it gives U.S. consumers one more reason to not stuff themselves with subsidized goods they so manifestly cannot afford. What it is not is nearly fast enough. While the yuan on Monday moved the most since its 2005 revaluation, economists are forecasting a 3.8 percent appreciation in the coming year, according to a Reuters poll. Financial markets are looking for less; offshore futures on Monday were betting on only a 2.6 percent move in the same period. If you accept the analysis of the Peterson Institute that the yuan is 24 percent undervalued, then we could be looking at nearly a decade before we reach something like a fair rate of exchange. I don't think that is nearly soon enough to escape a prospectively very nasty round of trade tensions, tensions that may start between the United States and China but do not have to be limited to that thorny relationship. Regardless of the great drift of history, the U.S. unemployment rate is still going to be something close to 10 percent come the election this autumn. By the time the yuan actually appreciates by 25 percent, the
United States would have a very serious long-term unemployment issue. While it is clear that this was a hard won concession ahead of the Group of 20 meeting, you can expect congressional rhetoric to shift up a gear in very short order. 2005 WAS A DIFFERENT WORLD To be sure, the yuan is already up 3.8 percent so far this year on a trade-weighted basis, courtesy of a shrinking euro. But while this may make Chinese officials loath to take big steps, it is actually one of the principal arguments for why they ought to act more quickly. The world is in a period where the principal threats are deflation and huge capacity under-utilization. The recession in the weaker parts of the euro zone currently being engineered to stave off a financing crisis means that pressure in the coming year over who sells what to whom will only grow. China would do well to not use Europe as an excuse, but rather try to get out in front. Analysis of how much we should expect by way of yuan appreciation seems mostly to be rooted in the experience of 2005, when a revaluation of the yuan ushered in a one-year move of 3.6 percent and a two-year appreciation of a little less than 8 percent. However 2005 was a very different time and China should not expect what played then to play now. The world was booming, U.S. unemployment was a shade over 6 percent and the talk in the euro zone was of convergence rather than a desperate fight to not break apart. "Unless there is a fundamental change in China's mode of development, it will be difficult to see the world not slipping into increased protectionism and every country/region having to fend for itself," Diana Choyleva of Lombard Street Research wrote to clients. "Even the Great Recession and China's decisive domestic demand recovery were not able to do more than cut China's current account surplus to 5.8 percent of GDP in 2009 from a peak of 10.6 percent of GDP in 2007." Expect too for the initial euphoria in financial markets to dissipate quickly as politics and reality intrude. China has done fantastically out of globalization, but has been lucky enough to do it mostly on its own terms. That luck might not hold. (Editing by James Dalgleish)
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CORPORATE WINNERS & LOSERS FROM A STRONGER YUAN June 21 - China’s signal it will let its yuan currency appreciate is good news for global manufacturers and resource companies that supply the world’s third-biggest economy with the equipment and commodities it needs to fuel growth. On the other hand, it could dampen the outlook for China’s own exporters and commodity producers. A relatively mild yuan appreciation against the dollar of about 5 percent would cause losses at these companies, according to a Reuters poll conducted at China's top trade fair in April. Following is a list of some likely winners and losers from any yuan appreciation. FOREIGN RESOURCE COMPANIES - WIN The shares of Brazilian mining giant Vale SA traded in New York rose 3 percent and were the seventh most actively traded issue on the New York Stock Exchange on Monday. Freeport-McMoRan Copper & Gold Inc was also up 3 percent and was among the 15 most active stocks in New York. In Canada, base metal producers Inmet Mining , First Quantum Minerals Ltd and Teck Resources all rose on Monday on hopes China’s move would increase its resource imports. CHINESE COMMODITY FIRMS - LOSE China’s commodity producers could be hardest hit over the longer term. Companies such as Aluminum Corp of China, Zijin Mining and PetroChina face dollar-linked prices for their output, but their costs are in yuan. If the yuan does strengthen, these firms would find their revenues falling while their costs remain steady. Those three companies’ shares were up about 5 percent in Asian trading on Monday. FOREIGN HEAVY MACHINERY MAKERS - WIN The world’s largest maker of earth-moving equipment, Caterpillar Inc , could be a major winner. The U.S. machinery giant sells billions of dollars worth of machinery and products to China each year. Its group president said on Saturday that Beijing’s move would help lift U.S. exports. Second-ranked Komatsu Ltd said every 1 percent rise in the yuan would boost its operating profit by 1.1 billion yen ($12.1 million). Caterpillar shares were up 0.4 percent late on Monday and Komatsu rose 4.6 percent in Tokyo. FOREIGN AUTOMAKERS - WIN Foreign automakers that sell cars in the world’s largest vehicle market, such as BMW AG, Volkswagen AG, General Motors Co, PSA Peugeot Citroen, the Renault-Nissan alliance and Fiat SpA, should also gain. BMW would benefit the most if the yuan continues to rise against the euro -- an outcome that is far from certain -- as its auto manufacturing joint venture with Brilliance China imports about half its parts, mainly from Germany. BMW shares were up 2.7 percent, Volkswagen rose 1 percent, Renault rose 3.6 percent, Nissan rose 2.8 percent, Fiat fell 0.2 percent and Brilliance rose 4.8 percent. CHINESE AIRLINES - WIN China’s three top carriers, Air China , China Eastern Airlines and China Southern Airlines, which borrow in foreign currencies to pay for aircraft, but generate revenue in yuan, could benefit the most. Airlines also use dollars to buy fuel. Deutsche Bank estimates a 1 percent yuan appreciation would boost Air China’s 2010 net profit by more than 10 percent, China Eastern Air’s by 15 percent and China Southern Air’s by 20.6 percent. The shares of the three airlines gained between 6 and 7 percent on Monday on double their normal volumes.
REUTERS YUAN WATCH
CONSUMERS, TECHS - WIN U.S. companies such as General Electric Co and Procter & Gamble Co are likely to make currency exchange gains when their China profits are converted into U.S. dollars. A spokeswoman for GE, which makes many of the products it sells in China in that country, said the U.S. conglomerate does not expect “any material impact” to its earnings from the change. Credit Suisse analysts estimated every 10 percent of appreciation of the yuan versus the dollar would boost the revenue and earnings of U.S. electric equipment makers by about 1 percent. PC maker Lenovo Group Ltd, which earned 47 percent of its sales in China in 2009, reports earnings in U.S. dollars. Lenovo shares were up more than 5 percent on Monday. No. 1 chipmaker Intel Corp expects limited effect from the change, a spokesman said. “All of Intel’s transactions worldwide are conducted in dollars so the effect of currency fluctuations is not a direct one on the company,” said spokesman Tom Beermann. “There would be secondary effects if currency valuations caused demand for our products (or products that use our chips) to increase or decline overseas.” Shares of Baidu Inc, China’s top search engine, were up 2 percent on the Nasdaq. GE was up 1 percent, Procter & Gamble was down 1 percent, Lenovo rose 5.2 percent and Yum rose 0.4 percent. Yum Brands Inc, which owns the KFC and Pizza Hut fast-food chains and generates more than one-third of its profits from its 3,500 locations in China, regards the move as good news, said spokesman Jonathan Blum. “China represents our No. 1 growth opportunity and we expect this to be a very positive development over the long-term,” Blum said. CHINESE FINANCIALS - WIN Chinese insurance companies such as China Life and Ping An Insurance should benefit as a yuan revaluation is expected to boost China’s domestic A-share stocks, which account for a large part of their investment portfolios. Chinese insurers can put up to 25 percent of their total investable assets into stocks, but most keep it below that level. Ping An shares jumped more than 6 percent on Monday on well over double the normal trading volumes and China Life rose 2 percent. FOREIGN LUXURY FIRMS - WIN A firmer yuan would likely boost other Asian currencies as a strong yuan is seen by investors as a pledge of confidence for Asia’s growth. That should help luxury goods makers, whose imported products will be cheaper across the region, just as more Asians benefit from increased wealth. At the top of the list are those luxury goods companies for whom Asia is a key market, such as Tiffany & Co, Bulgari SpA, Hermes International SCA and LVMH Moet Hennessy Louis Vuitton. Tiffany shares fell 1 percent, Bulgari was down 0.5 percent, Hermes and LVMH rose 3 percent. FOREIGN RETAILERS - LOSE Big retailers that source from Asia, such as Hennes & Mauritz and Target and Wal-Mart Stores Inc , would see a firmer yuan push up production costs. It could also hit Walt Disney Co, which has signed a memorandum of understanding to build an amusement park in Shanghai, as it would have to spend more in U.S. dollars to fund investments. Aeon Co Ltd said yuan appreciation would have an impact because Japan’s second-biggest retailer imports a percentage of its products from China. Spokesman Eiichi Yamatani said Aeon would continue to diversify its product manufacturing base due to rising labor costs in China. H&M shares were little changed, Target was down 2 percent, Wal-Mart was off 1.4 percent, Disney shed 0.8 percent and Aeon was up 3.7 percent. (Reporting by HONG KONG, SHANGHAI, TOKYO, LOS ANGELES and BOSTON bureaux) For Reuters 3000 Xtra subscribers: China Yuan Policy Top News Page Top China news Thomson Reuters yuan microsite
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