Tag Archives: yuan

China Said to Plan Asking U.S. on Timing of Fed Rate Hike

Bloomberg, May 25, 2016

China ask USA

Chinese officials plan to ask their American counterparts in annual talks next month about the chance of a Federal Reserve interest-rate increase in June, according to people familiar with the matter.

The Chinese delegation will try to deduce whether a June or a July rate rise is more likely, as the nation’s policy makers prepare for the potential impact on financial markets and the yuan, the people said, asking not to be named as the discussions were private. In China’s view, if the Fed does lift borrowing costs, a July move would be preferable, the people said. A People’s Bank of China press officer later denied that China plans to ask about the timing of a Fed rate hike.

China’s exchange rate has already been weakening as expectations rise for the U.S. central bank to boost its benchmark rate for the first time since it ended its near-zero policy in December with a quarter percentage point increase. It’s not unusual for senior officials to press each other on their policies, and any inquiries by the Chinese about the Fed would follow repeated expressions of concern from the U.S. about China’s intentions with its exchange rate. The Treasury Department put China on a new currency watch list last month to monitor for unfair trade advantages.

Tread Cautiously

“The Chinese side will argue that the U.S. should tread cautiously as it tightens monetary policy and avoid any surprises,” said Mark Williams, chief Asia economist at Capital Economics in London, who participated in U.K.-China meetings when working at Britain’s Treasury. “The Federal Reserve will make its decision solely on what it deems best for the U.S. economy, but it is clear that concerns about China have influenced its thinking about the balance of risks facing the U.S.”

The yuan has dropped about 1.2 percent this month, joining emerging market peers from India to Brazil and Malaysia in depreciating versus the U.S. currency. On Wednesday, the yuan traded near a three-month low after China’s central bank set the weakest reference rate in five years.

The annual U.S.-China Strategic and Economic dialog talks are scheduled for June 6-7 in Beijing, little more than a week ahead of the Fed’s next policy meeting. Interest-rate futures currently show about a 34 percent chance of a boost on June 15, from the Fed’s current target range of 0.25 percent to 0.5 percent for the federal funds rate.

‘Pretty Anxious’

“Chinese officials are pretty anxious about the Fed as a June rate hike — which is not fully discounted in the market — may boost the dollar,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “This could pose a threat or make it difficult for the PBOC to keep a stable RMB exchange rate,” he said, referring to the renminbi, another term for the yuan. “A less aggressive Fed stance is in China’s interest.”

While the U.S. delegation is led by the secretaries of the Treasury and State departments, the chair of the Fed has typically attended the gatherings. Chair Janet Yellen has participated in both of the meetings since taking the U.S. central bank’s helm in 2014. Fed policy makers have increasingly in recent years highlighted the role of international ramifications of their policy decisions — something directly addressed in the past three years of joint “fact sheet” statements from the U.S.-China talks.

Fed’s Pledge

“The Federal Reserve is sensitive to the effects of its polices on the international financial system. A key goal of the Federal Reserve is to maintain financial stability both domestically and internationally,” the fact sheets said, as posted on the U.S. Treasury’s website.

Consulting on policy decisions would be in keeping with a pledge that both China and the U.S. made as members of the Group of 20. After a Shanghai meeting in February, G-20 finance chiefs pledged to consult closely and “clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty” and minimize spillovers.

The U.S. embassy in Beijing didn’t have an immediate comment on whether the Fed will participate in the Beijing talks.

China’s indications of concern about coming Fed policy moves follow a period of relative stability for the country’s markets. A surprise devaluation in the yuan last August helped send both Chinese and global stock markets tumbling. Yellen in September indicated that China worries played a role in delaying a Fed rate hike. Meantime, China last year ended up spending a record amount of its foreign-exchange reserves to counter capital outflows and a sinking yuan.

Volatile Times

Volatility jumped again in January, when the yuan weakened amid what was perceived to be a lack of clear communication from China on its intentions. Repeated assurances that Chinese policy makers were committed to a stable currency helped to quell concerns by February. China was also helped by a slide in the dollar as expectations for an earlier Fed rate increase diminished.

The Fed narrative is now changing, with officials signaling that their June meeting is in play. New York Fed President William Dudley said earlier this month that the policy-setting committee is moving closer to raising rates at one of its next two meetings and that the fact this message was getting through to financial markets was welcome news.

“The Fed’s inaction has given China a short break,” Kevin Lai, chief economist for Asia excluding Japan at Daiwa Capital Markets, wrote in a note this week. “Yet, the fundamental picture hasn’t changed. Global investors seem increasingly concerned about the level of indebtedness in China and skeptical about its ability to handle a range of problems.”

Source

China cuts yuan fix in biggest move since devaluation

Yahoo, May 04, 2016

The People's Bank of China has set the value of the yuan at 6.4943 to $1.0, weakening 0.59 percent from the fix of 6.4565 the previous day

The People’s Bank of China has set the value of the yuan at 6.4943 to $1.0, weakening 0.59 percent from the fix of 6.4565 the previous day

China’s central bank on Wednesday fixed the yuan currency nearly 0.60 percent weaker against the US dollar, according to the national foreign exchange market, the biggest downward move since devaluing the unit in August last year.

The People’s Bank of China set the value of the yuan — also known as the renminbi (RMB) — at 6.4943 to $1.0, weakening 0.59 percent from the fix of 6.4565 the previous day, according to data from the Foreign Exchange Trade System.

China only allows the yuan to rise or fall two percent on either side of the daily fix, one of the ways it maintains control over the currency.

Analysts said the weaker fix was in line with strength in the US dollar on Tuesday, as financial authorities seek to make trading more market oriented.

The dollar rose against most of its peers Tuesday as global growth worries swept equity markets and pushed oil prices lower, boosting demand for the safe-haven US currency.

“To maintain a stable currency market, the RMB weakened accordingly,” Liu Xuezhi, an analyst at the Bank of Communications, told AFP.

Wednesday’s cut came after China on Friday raised the yuan-dollar exchange rate by 0.56 percent from the previous day, the biggest increase in almost 11 years.

“I think China wants to keep the market guessing on its fixings,” Mitul Kotecha, head of Asia FX and rates strategy at Barclays in Singapore, told AFP.

“It remains difficult to forecast on each day,” he said, adding that would help prevent speculation on the currency, a Chinese policy goal.

The world’s second-largest economy rattled global investors with a surprise devaluation last August, when it guided the normally stable yuan down nearly five percent over a week.

The yuan was quoted at 6.5000 at 4:30 pm (0830 GMT) on Wednesday, down 0.40 percent from Tuesday’s close of 6.4743, according to the Foreign Exchange Trade System.

Source

China’s Central Bank Raises Yuan Fixing by Most Since July 2005

Bloomberg, Apr 29, 2016

yuan

* Greenback fell 1% on Thursday as BOJ decision lifted yen
* Offshore yuan’s reaction muted as stronger fixing expected

China’s central bank responded to an overnight tumble in the dollar by strengthening its currency fixing the most since a peg was dismantled in July 2005.

The reference rate was raised by 0.6 percent to 6.4589 per dollar. A gauge of the dollar’s strength extended its 1 percent slide on Thursday, when the Bank of Japan’s decision to unexpectedly keep monetary policy unchanged sent the yen surging. The offshore yuan weakened 0.12 percent to 6.4914 as of 5:35 p.m. in Hong Kong after gaining 0.3 percent in the last session.

While the change in the fixing is extreme relative to the small moves of recent years, analysts said it reflects increased volatility in the dollar against other major exchange rates rather than a policy shift by the People’s Bank of China. The yuan weakened against a basket of peers on Friday.

“The offshore yuan’s reaction is muted, so it seems the market was already expecting a much stronger fixing,” said Ken Cheung, a currency strategist at Mizuho Bank Ltd. in Hong Kong. “This is a reaction to the dollar weakness overnight, and there’s not much in the way of policy intention to read into.”

The dollar headed for its the lowest close in almost a year on Friday as signs of slowing growth in the U.S. dimmed prospects for a Federal Reserve interest-rate increase. A Bloomberg replica of the CFETS RMB Index, which measures the yuan against 13 exchange rates, fell 0.2 percent to a 17-month low. The onshore yuan weakened 0.2 percent.

“The fixing is no surprise, the expectation for a stronger yuan fix was laid by the gains for the yen after the Bank of Japan announcement yesterday,” said Patrick Bennett, a strategist at Canadian Imperial Bank of Commerce in Hong Kong. “The trade-weighted basket continues to depreciate, albeit at a modest pace. But the key to the lower trade-weighted rate does not really lie with the PBOC, rather it is the dollar weakness against other major currencies which is the main driver.”

Source

China Inc.’s Record Foreign Deal Spree Shows Fear of Weaker Yuan

Bloomberg, Apr 5, 2016

* Outbound deals top $97 billion this year, 80% of 2015’s total
* Citigroup sees yuan sinking 7 percent through end-2017

China Inc. can’t buy foreign companies fast enough, and the yuan’s trajectory helps explain why.

The Chinese currency will weaken 3.3 percent versus the dollar by year-end, a Bloomberg survey of strategists found, with the world’s largest foreign-exchange trader Citigroup Inc. forecasting a 7 percent slide through 2017. The projections show the potential cost of delaying instead of dealmaking, and China’s firms are getting the message. The value of their offshore acquisitions reached $97.4 billion this year, already 80 percent of 2015’s record, data compiled by Bloomberg show.

“A lot of people in China are saying the yuan is going to weaken against the dollar so they take it out and put money into U.S. dollar investments,” Mark Mobius, chairman at the Templeton Emerging Markets Group, said in an interview last week, forecasting “mild” depreciation of the currency. “There’s no question that Chinese companies want to become world class, which is why acquisitions make a lot of sense.”

China National Chemical Corp. and Qingdao Haier Co. are among corporations snapping up everything from appliance makers to film studios and chip technology. Even as China’s authorities seek to stem a mass exodus of capital, President Xi Jinping’s government is encouraging foreign dealmaking to win know-how and global market share.

“The yuan’s moves do act as a driver for Chinese acquirers,” said Samson Lo, head of Asian mergers and acquisitions at UBS Group AG. “That’s why they’re moving forward now, because they’re concerned about the longer term.”

Weakening Yuan

The yuan stopped being a one-way bet in 2014 after the currency’s appreciation against the dollar in all but one year since a peg to the dollar ended in 2005 made it the world’s best-performer after the Swiss franc. The yuan lost 6.8 percent in the two years through December, encouraging companies to speed up overseas expansion as growth in the world’s second-largest economy slowed.

After the worst start to a year in two decades drove the yuan to a 2011 low this January, the currency has climbed 1.9 percent to 6.4699 a dollar. The exchange rate will decline to 6.7 per dollar by year-end, according to the median estimate of 43 strategists in a Bloomberg survey. Citigroup forecasts the yuan will weaken to 6.97 by the end of 2017.

Shopping Spree

For Chinese companies worried about devaluation, “the time to go global is right now,” said Zhao Longkai, an associate professor of finance at Peking University’s Guanghua School of Management. “Chinese firms will try to hedge the currency, and so it makes sense to diversify some assets abroad.”

ChemChina’s $43 billion purchase of Switzerland’s Syngenta AG tops the list of acquisitions this year, followed by the $6 billion buyout of Ingram Micro Inc. by an arm of HNA Group Co. and Haier’s $5.4 billion takeover of the appliances business of General Electric Co.

Cash held on Chinese corporate balance sheets increased 8 percent to $3.78 trillion in the past two years, according to Bloomberg-compiled data, and mainland-listed companies trade at a 7.7 percent premium to peers in other emerging markets.

Government Dilemma

“Assets are cheap abroad, borrowing costs are low globally, and expectations for further renminbi depreciation are probably encouraging more companies to buy foreign assets,” said Ken Hu, chief investment officer of Asia-Pacific fixed income at Invesco Hong Kong Ltd. Still, “the impact on capital outflows will be much smaller than the headline number shows” as foreign deals are often funded overseas.

ChemChina got $50 billion in financing for its purchase of Swiss pesticides producer Syngenta, including $35 billion that’s being or will be syndicated offshore, people familiar with the matter have said. Chinese offshore borrowers took out $17.3 billion of loans in the first quarter, accounting for about 37 percent of North Asia loan volume, according to Bloomberg-compiled data.

Even with some of the money coming from outside the nation’s borders, China Inc.’s shopping spree poses a dilemma for authorities trying to stem capital outflows while also making progress on a long-term goal of allowing businesses to go global and become international champions.

“The Chinese government will probably be reluctant to see too much of this happening because the amount is big, in billions of dollars,” Mobius said. “There’s a dilemma as on one hand, they want companies to become world class and on the other hand, they don’t want to see huge amounts of money flowing out of the country.” Mobius echoed Hu’s view, saying almost half of the investments will be funded overseas.

Sustainable Trend

After the yuan’s first quarterly advance in a year, the case for depreciation hasn’t gone away. Chinese economic growth, which clocked in at 6.9 percent in 2015, the slowest in 25 years, will decelerate to 6.5 percent this year and 6.3 percent in 2017, according to forecasts compiled by Bloomberg.

A Bloomberg replica of the CFETS RMB Index, which the People’s Bank of China uses to track the yuan against 13 exchange rates, fell below 98 for the first time since 2014 last week. Governor Zhou Xiaochuan pledged in February to keep the yuan stable against its peers while increasing volatility versus the dollar.

“The overseas allocation of Chinese capital will continue, either from a currency diversification or a geographical diversification perspective,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “It is consistent with the consensus expectation for a weaker yuan ahead.”

Source

John Rubino: Welcome To The Currency War, Part 22: China Devaluation Watch

By John Rubino, Mar 11, 2016

Welcome To The Currency War, Part 22: China Devaluation Watch

Not so long ago, a big Chinese currency devaluation seemed both inevitable and imminent. The story went like this: China had borrowed tens of trillions of dollars in response to the Great Recession and squandered much of it on uncompetitive factories and ghost cities. The companies and governments that own these worthless assets were about to go broke en masse.

China would, as a result, have no choice but to cut the yuan’s value by as much as 40% to make domestic debts manageable and export industries competitive. Hedge funds, led by Hayman Capital’s Kyle Bass, were gearing up to bet billions on this event.

From a Bass report to his investors (via the Value Walk website):

Over the past decade, we have worked diligently to identify anomalies in financial systems, governments, and companies around the world. We have been vigorously studying China over the last year, with the view that the rapid credit expansion in the Chinese banking system will result in significant credit losses that will require the recapitalization of Chinese banks and materially pressure the Chinese currency. This outcome will have many near-term and long-term effects on countries and markets around the world. In other words, what happens in China will not stay in China.

The unwavering faith that the Chinese will somehow be able to successfully avoid anything more severe than a moderate economic slowdown by continuing to rely on the perpetual expansion of credit reminds us of the belief in 2006 that US home prices would never decline. Similar to the US banking system in its approach to the Global Financial Crisis (“GFC”), China’s banking system has increasingly pursued excessive leverage, regulatory arbitrage, and irresponsible risk taking. Recently, we have had numerous discussions with various Wall Street firms, consultants, and other respected China experts, and they almost all share the view that China will pull through without a reset of its economic conditions. What we have come to realize through these discussions is that many have come to their conclusion without fully appreciating the size of the Chinese banking system and the composition of assets at individual banks. More importantly, banking system losses – which could exceed 400% of the US banking losses incurred during the subprime crisis – are starting to accelerate.

Our research suggests that China does not have the financial arsenal to continue on without restructuring many of its banks and undergoing a large devaluation of its currency. It is normal for economies and markets to experience cycles, and a near-term downturn that works to correct the current economic imbalance does not qualitatively change China’s longer-term growth outlook and transition to a service economy. However, credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world. What we are witnessing is the resetting of the largest macro imbalance the world has ever seen. [emphasis added]

So how did we get here? Since 2004, China’s real effective exchange rate has appreciated 60%. The majority of this appreciation occurred in the last few years as the ECB and BOJ both actively targeted weaker exchange rates to stimulate Europe’s and Japan’s large export sectors, respectively. While the markets seem solely focused on China’s exchange rate versus the US dollar, this fixation misses the point that many other manufacturing economies and currencies, including those belonging to Japan, Europe, Russia, and several Southeast Asian countries, have gained significant price advantages at China’s expense. If China is to achieve the required clawback of its real effective exchange rate, the renminbi will need to devalue against a trade-weighted basket of currencies and not just the dollar. In effect, the required devaluation against the dollar will need to be multiplied to achieve the necessary result.

As the renminbi appreciated over the last decade, China undertook a massive infrastructure spending program in order to maintain politically-determined GDP growth targets in the face of these headwinds. This policy action created a system of distorted incentives (not to mention a dramatic misallocation of capital) whereby local officials were promoted to higher office by exceeding those targets without regard to the return on investment of the projects they supported. In 2005, exports and investment constituted 34% and 42% of China’s GDP, respectively. By 2014, exports had fallen to 23% and investment had grown to 46%. This growth in investment was funded by rapid credit expansion in China’s banking system, which grew from $3 trillion in 2006 to $34 trillion in 2015.

Today China is at a point where its banking system can no longer support such massive growth, and the strong renminbi has effectively undermined the competitiveness of China’s export economy. A dramatic devaluation of the renminbi is warranted to regain export competitiveness; however, the Chinese authorities have errantly fought against this so far, spending around $1 trillion to defend their currency. The continued capital outflows and emerging need to deal with losses in the banking sector will eventually force China to change tack and allow (or enable) a devaluation that resets growth as many countries have done over the past eight years.

China: Divergence in Bank Asset Growth and GDP
China imbalance March 16

There’s much, much more in Bass’ letter, all of it pointing to an epic crisis in which the exposure of China’s fake growth numbers, historically-unprecedented levels of malinvestment and evaporating foreign exchange reserves combine to force a devaluation.

But apparently not yet:

Yuan Hits Strongest Level Against Dollar Since Early December

(Wall Street Journal) – The yuan hit its strongest level against the dollar since early December on Friday, after the Chinese central bank boosted the fixed rate to keep up with the euro’s big gains overnight, analysts said.

Analysts said the move likely came as a result of a sharp rally in the euro Thursday, after European Central Bank President Mario Draghi appeared to suggest that the central bank wouldn’t cut interest rates further into negative territory. Mr. Draghi’s comments came after the central bank delivered another rate cut and ramped up its bond-buying program.

China wants to keep its currency in line with those of top trading partners Japan and Europe, said Daniel Tenengauzer, a managing director at RBC Capital Markets. “With the euro going up after the ECB yesterday, it makes sense that the bank would raise the fix,” he said.

Last year, the People’s Bank of China said it would change the way it manages the yuan’s value, with the exchange rate now being measured against a basket of currencies of its trading partners rather than the dollar alone. The move was seen as a demonstration of China’s determination to make the yuan a global currency, with a value determined more in line with other major currencies.

So is the China devaluation thesis false or just early?

History teaches that huge imbalances seldom just evaporate. Most of the time they’re rectified through sudden, wrenching change — market crashes, recessions/depressions and, yes, devaluations.

In China’s case, the combined effects of an overvalued currency and a global slowdown have caused its exports to plunge, while supporting the yuan has forced it to burn through nearly half a trillion dollars of foreign exchange reserves in the past year. Since it can’t fix the global economy, devaluation seems to be the only remaining tool in the box.

Chinese exports March 16

China forex reserves March 16

But history also teaches that imbalances can persist for a shockingly long time before causing a crisis. So add the overvalued yuan to the list of Money Bubble sub-sections that should have blown up long ago — and will certainly blow up one of these days — but for now, somehow, are still going.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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