Chinese currency quickening pace of appreciation

The change may seem minuscule. But for those who follow China's currency, 0.8% is practically a bonanza.

That's how much the Chinese yuan has appreciated against the dollar in the last week, its fastest pace in almost a year.

Monday showed no signs of slowing down as China's central bank set its so-called parity exchange rate at 6.395 yuan for each dollar, giving the Chinese currency a value of 15.64 U.S. cents, a record high. (The bank sets the rate in the morning before every currency trading session and allows the yuan to strengthen or weaken 0.5%.)

The yuan has gained 3.1% against the greenback this year and 6.8% since June 2010, when China depegged its currency from the dollar. Many analysts had expected the yuan to climb just over 6% for the year, but the last few days may give them reason to revise on the upside.

The uptick in appreciation is welcome news to trading partners who have long argued that China unfairly undervalues its currency to boost its exports. Reinforcing that view, China last week reported its largest trade surplus in more than two years.

Diplomacy may be at play as well. The yuan's strengthening comes right before Vice President Joe Biden's arrival in China this week. The last time the so-called redback grew this fast was last September, when Washington was preparing a report on China's currency regime.

But more than anything, analysts say, the strengthening yuan has to do with China's growing battle with inflation, which hit a 37-month high in July, stoking fears of social instability the cost of food.

A mightier yuan would make imports cheaper and rein in the nation's over-abundant money supply.

The recent downgrade of U.S. government debt by Standard & Poor's has also raised doubts in Beijing about the merits of running large trade surpluses, which increase China's foreign-currency reserves. With few other viable ways to invest that money, China has accumulated about $1.2 trillion in U.S. Treasuries.

In a recent research note, Daniel Hui, a senior foreign exchange strategist at HSBC, said of the yuan's quickening appreciation:

[I]t is increasingly likely that this is going beyond just macro factors, and that domestic politics is becoming increasingly important.

We have long viewed [foreign exchange] policy as ultimately being the outcome of a domestic political process. Now, the U.S. sovereign downgrade by S&P as well as the seemingly increased potential for a third round of quantitative easing is stoking real debate [in China] as to the broader costs and benefits of China's choice of exchange rate policy. This, alongside recent domestic discontent, may have been enough to shift [foreign exchange] policy away from the previous stance, becoming more permissive and lessening the requirement for such large accumulation of dollars. If so, this new, accelerated pace of appreciation could last for some time.

The trend could also mean that China's central bank, which favors liberalizing the country's financial sector, is gaining ground against pro-export forces -- namely rich coastal provinces and their patron in the central government, the Ministry of Commerce.

The ministry has said that a sharp appreciation of the yuan would leave millions of factory workers out of jobs. 

But Li Jie, head of the Reserves Research Institute at the Central University of Finance and Economics in Beijing, disagrees, telling The Times last week that a stronger yuan would help the country's manufacturers by reducing raw-material prices and wages.

"It would easily offset the pain of having more expensive exports," Li said.

-- David Pierson

Photo: A grocery store cashier holds 100-yuan notes in Beijing. Credit: Frederic J. Brown / AFP / Getty Images

 

 

 

 

 

Asian markets close day of mixed trading

Trading was mixed in Asian markets Thursday as investors remained jittery over the European debt crisis and faltering global economy.

Japan's Nikkei 225 stock average fell 0.6% to 8,981.84 on a day of wild swings for the yen. Hong Kong's Hang Seng index declined 1% to 19,595.14, Taiwan's Taiex lost 0.2% to 7,719.09 and Australia's S&P/ASX 200 index ended down 0.5% to 4,140.8.

Advancing were China's Shanghai Composite Index, which gained 1.3% to 2,581.51, and South Korea's Kospi, which rose 0.6% to 1,817.44, the second day of gains after the country's Financial Services Commission banned short selling.

The regulating agency's chairman said on a radio program Thursday that South Korea would fare better than it did in the 2008 financial crisis if another global recession were to arise, Reuters reported.

-- David Pierson

Photo: Pedestrians are reflected on a display board showing the current Nikkei share average in Tokyo. Credit: Kim Kyung-Hoon / Reuters

 

Asian stocks dive in early trading

Asian stocks joined the global sell-off in early trading Thursday, mirroring the renewed panic on Wall Street a day earlier.

Within about 20 minutes of opening, Japan's Nikkei 225 stock average sank 1.6%, South Korea's Kospi index fell 2% and New Zealand's NZX-50 was down 0.7%.

Asian shares saw major gains Tuesday but appear just as concerned about Europe's debt crisis that rattled U.S. markets hours earlier.  

Photo: Foreign currency dealers talk at the Korea Exchange Bank in Seoul on Monday. Credit: Truth Leem / Reuters

China's trade surplus surges

China's trade surplus in July swelled to its highest level in more than two years on the strength of European demand and Asian emerging markets, but could decline if the global economy continues to weaken.

The country's trade surplus rose to $31.5 billion in July, the biggest gap since January 2009, and up from the $22.3-billion surplus registered in June, China reported Wednesday.

Chinese exports grew 20.4% from a year ago, to $175.1 billion, the strongest performance since April. Meanwhile, imports rose 22.9% from a year ago, to $143.6 billion. 

Growth in shipments to Europe doubled between July and June, and exports to Japan saw solid recovery. Sales of Chinese goods to developing countries in Asia, such as Vietnam and Indonesia, continued to strengthen.

Economists warned that the trade numbers could sour with this week's battering of financial markets possibly triggering another global recession.

"The better export and import growth from China may offer some [temporary] relief to the jittery market, though their outlooks look more uncertain as global market turmoil and expected weaker global growth prospects also point to downside risks to China's trade and economic growth," wrote Jian Chang of Barclays Capital Research in a note to clients Wednesday.

The unexpectedly high trade surplus could worsen trade tension and bolster calls for China to appreciate its currency.

The yuan rose a 17-year high against the dollar Wednesday morning at 6.4170. Analysts say China may be compelled to strengthen the yuan further to help tackle the country's highest inflation in 37 months.

-- David Pierson

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Photo: Container vessels are loaded with cargo at the port of Qingdao in eastern China's Shandong province. Credit: Wu Hong / EPA

Asian markets recover after early losses

Asian stocks rebounded after a volatile day of trading Tuesday that sent markets nosediving in the morning before clawing back to more stable territory.

Japan's Nikkei 225 stock average closed down 1.7%,to 8,944.48, after losing more then 4% earlier in the day and briefly reaching its lowest level since March 15, the aftermath of the nation's devastating earthquake and tsunami.

Mitsubishi UFJ Financial Group fell 3.2% and Canon, the world's largest camera maker, slid 1.9%. Inpex Corp., Japan's biggest oil-exploration company lost 5.5% in response to falling oil prices, which dropped to $78 a barrel amid a dumping of commodities.

Trading swung even more wildly on Australia's S&P/ASX 200 which hit a two-year low in the morning before turning around at noon to end the day with a gain of 1.2%, to 4,034.80.

Analysts told the Australian Associated Press that investors returned to buying after China's consumer price index data showed non-food inflation declining, delaying the prospects of another interest rate hike in Beijing. Australia is a major supplier of commodities to China.

South Korea's Kospi fell by as much as 10% only to recover for a loss of 3.6%, to 1,801.35, at its closing. The index, which was battered by fleeing foreign investors, was being bolstered later in the day by public institutions and pension funds, the Wall Street Journal reported.

Hong Kong's Hang Seng was trading down 1.9% by late afternoon, a significant improvement from the morning when investors were spooked by China's inflation report showing year-on-year consumer price growth at a 37-month high.

-- David Pierson

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Inflation remains high in China, limits Beijing's policy options

China's inflation rate rose to its highest level in more than three years in July, underscoring the problem ahead for the Beijing government if the global economy sinks into another recession.

The country's consumer price index rose 6.5% from July of last year, coming in slightly higher than expected and up from the 6.4% posted in June, China's National Bureau of Statistics said Tuesday.

Food prices again led the rise in prices, growing 14.8% from a year earlier. The inflation rate is now showing its highest year-over-year growth since June 2008.

China has been trying to rein in its overheated economy with a combination of interest-rate hikes, increases in bank reserve ratios and stricter homebuying rules.

But the recent plunge in world markets and uncertainty in U.S. and European economies will complicate those efforts now that China could be pulled into another global financial crisis.

In 2008, Beijing was able to use a massive stimulus program and record bank lending to keep its economy charging forward. The result of that aggressive policy is not only an economy that expanded a sizzling 9.5% in the second quarter but also today's persistent inflation and rising debt brought on by massive investment projects.

Analysts say the central government will now be limited in its ability to shield the country from any major economic contagion -- a worrying thought for those who expected China to lead the global economy onto solid ground.

"Beijing's policy response to this kind of a growth slowdown would look much different in 2011 than it did in 2008," said Nicholas Consonery, an analyst with the Eurasia Group. "Most importantly, the leadership's hands are more tied on monetary policy. Pressing inflation, along with local government and banking debt concerns, will drive the leadership to avoid renewing monetary stimulus, even if doing so means slower economic growth. Beijing simply does not have another silver bullet in its arsenal."

-- David Pierson

Photo: A vendor waits for customers at a Beijing fruit stall. Credit: AFP/Getty Images

Asian stocks hit hard in early trading

Stocks in Tokyo were battered in early trading Tuesday, joining the rout in New York and other global markets.

An hour after opening, the Nikkei 225 stock average was down nearly 4%, in what appears to continued panicked selling after Standard & Poor's downgraded the United States' credit rating Friday.

The dive brought the index close to its lowest level of the year, which was set March 15 after the country's devastating earthquake and tsunami.

Other Asian markets also fared poorly in morning activity. South Korea's Kospi continued its free fall by plunging as much as 5%, triggering a brief halt to trading for the second day in a row.

South Korean Finance Minister Bahk Jae-wan called for a global response at a policy meeting Tuesday morning, the Wall Street Journal reported.

"No individual country can adequately respond to this financial market shock on its own," Bahk said. "Given our nature as a small and open economy, we need to strengthen policy collaboration with other countries."

Australia's S&P/ASX200 was down 5.4% in early trading.

-- David Pierson

Photo: Foreign currency dealers talk at the Korea Exchange Bank in Seoul on Monday. Credit: Truth Leem / Reuters

Asian stocks plunge on first day of trading after U.S. downgrade

Asian shares plummeted Monday on the first day of trading after an unprecedented downgrading of U.S. government credit last week, raising fears the global economy was heading for deeper trouble.

In what could be a preview of U.S. markets, Hong Kong's Hang Seng fell 2.3% to 20,464.03, Japan's Nikkei 225 stock average dropped 2.2% to 9,097.56 and the Shanghai Composite Index lost 3.8% to end at 2,526.82.

"From how fast the market is falling, I can see people are really scared,” said Chen Wenzhao, an analyst for China Merchant Securities in Shanghai. “In the short term, it may be really hard for people to overcome their worries."

The steep losses came even after global policymakers said efforts would be made to restore confidence in financial markets.

Trading on South Korea's Kospi was briefly halted after it nosedived by as much as 7.4% in the afternoon. The index ended the day down 3.8% to 1,869.45.

"We're seeing real panic selling now," said Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $29 billion, told Bloomberg. "Concerns about global economic conditions are affecting Asian markets overall. Korea, which has relatively more liquidity, is feeling a harder pinch."

Indonesian President Susilo Bambang Yudhoyono said he would hold an emergency meeting with his Cabinet after stocks in his country fell about 5%, Reuters reported.

In other Asian markets, Taiwan's Taiex slumped 3.8% to 7,552.80, Australia's S&P/ASX 200 index dropped 2.9% to 3,986.10 and Singapore's Straits Times Index fell 2.9% by later afternoon.

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-- David Pierson

Photo: An investor in front of a stock price board at a brokerage in Shanghai earlier this year. Credit: Eugene Hoshiko / Associated Press

China raises interest rates for third time this year to tackle inflation

China raised its benchmark interest rates for the third time this year in a clear move to tackle inflation, which hit a 34-month high in May.

The People's Bank of China said Wednesday it hiked the rates by 0.25 percentage points each, lifting the benchmark one-year lending rate to 6.56% and the benchmark one-year deposit rate to 3.5%.

The moves come amid speculation that China's consumer price index, the country's main gauge of inflation, could hit a three-year high in June. The government will announce the figures July 15.

Policymakers now face the threat of an economic slide or hard landing as credit growth is slowly curtailed. The country has already increased the amount of capital that banks must hold in reserves to record highs.

Already, there are some signs that China's overheated economy could be entering a modest cool-down period. An index of manufacturing activity fell to a 28-month low in June. Bankruptcies of small- and medium-sized companies are said to be rising.

Mark Williams, an analyst for Capital Economics, said interest rates were still low compared with the rate of economic growth, and that he believed enough credit would be available to avoid a deep slump.

"Higher borrowing costs from banks will make little difference in practice," Williams wrote in a note to clients. "Benchmark lending rates are still low relative to the pace of economic growth. The constraint on credit growth is the amount that banks can lend rather than the rates they charge."

Unlike other countries, China sets lending quotas for its banks -- a policy tool that often has far greater effect than interest rates.

Inflation in China has been led by rising food prices, the latest being the soaring cost of pork. Pig shortages and higher costs for grain led to a 40.4% year-on-year increase in consumer prices for the meat in May.

Central-government leaders are said to be sensitive to runaway prices because it could sow social instability.

In an editorial published last month in the Financial Times, Chinese Premier Wen Jiabao even went so far as to say prices would be kept firmly under control this year.

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-- David Pierson

Photo: A butcher sells pork at a market in Shenyang, northeast China. China's central bank raised interest rates Wednesday to tackle rising inflationary pressure fueled mostly by soaring food prices. Pork prices rose more than 40% in May compared with a year earlier. Credit: EPA

Local government debt in China raises risk

China’s national audit office said Monday that local governments had amassed $1.65 trillion of debt by the end of last year and warned that much of the borrowing was unregulated and had trickled into the real estate and stock markets.

The first-of-its-kind review highlights one of the biggest risks to China’s economy, which is bracing for a slowdown this year as it battles its highest inflation in nearly three years.

About half the outstanding debt was incurred after 2009 when Beijing allowed banks to issue a record amount of new credit to stimulate the economy. Provincial, county and city level governments borrowed willingly to fend off the effects of the global financial crisis.

About 37% of the total debt went toward infrastructure construction, 25% went to public transportation, 11% was used to buy land and about 10% was spent on education, subsidized housing and healthcare, the audit said.

The borrowing went about with little oversight, which allowed municipalities to lie about the value of their collateral, improperly funnel the loans to the property and stock markets and downplay their ability to pay off the debt, auditors said.

Nearly half the debt was issued through thousands of local government investment companies whose borrowing would not show-up on municipal balance sheets [It’s unclear how the rest of the loans were borrowed]. Local governments were encouraged to set-up the companies because they are prohibited from borrowing loans or issuing bonds directly.

Beijing cracked down on the most troubled investment companies last year, ordering banks to stop issuing credit to them.

To pay off the loans, governments relied increasingly on sales of local land to developers. Experts say this contributed significantly to China’s overheated property market as officials benefited from increasingly richer land sales, which ultimately drove-up the price of property to consumers.
Some infrastructure projects such as highways and rail won’t be profitable for years, increasing the likelihood they could default on their loans.

“The ability of some [local governments] to repay the debt is low,” said Liu Jiayi, the country’s auditor-general. “There are hidden risks. And some rely heavily on land sales to repay the debts.”

Qu Hongbin, co-head of Asian Economics Research for HSBC, said policymakers can avert crisis if they can refinance the debt, which is equal to about 27% of China’s growth domestic product.

“Although the size is still manageable, Beijing needs to take immediate action to restructure these debts to mitigate defaulting risks,” Qu said. “We think allowing local governments to issue bonds to be the most feasible option in the near-term.”

--David Pierson  

Photo: A worker jumps over a puddle near a residential construction site in Taiyuan, Shanxi province. Credit: Reuters. 

China raises reserve ratio for banks to ward off inflation

 
China raised the reserve ratio for the nation's banks Tuesday for a sixth time this year, just hours after announcing the highest inflation numbers in 34 months.

The hike of 50 basis points raises to record highs the amount of deposits that Chinese banks must hold in reserve rather than lend out to consumers and businesses. The measure, which goes into effect June 20, is aimed at cooling the economy by taking about $59 billion out of China’s banking system, said Qu Hongbin, co-head of Asian Economics Research for HSBC.

“Inflation, not growth, remains the top macro risk facing policymakers,” Qu said.

China’s consumer price index, the main gauge of inflation, grew 5.5% in May from a year earlier — the fastest pace since July 2008.

Rising prices for basics such as food, fuel and housing are squeezing the budgets of working families. Central policymakers appear determined to rein in inflation, considered one of the greatest threats to social stability, even at the risk of slowing China’s economy.

However, their decision to boost the reserve ratio instead of raising benchmark interest rates — a much more aggressive move — signals that they don't want to tighten too much too quickly, analysts said.

“Officials tend to use benchmark interest rates in that signaling role but they may have thought that, given current growth concerns, the signal that would give would be too strong,” said Mark Williams, senior China economist for Capital Economics.

Still, that doesn’t rule out an interest rate hike in the coming weeks. Analysts said inflation hasn't peaked and the likelihood of the third rate hike this year remains strong, along with additional reserve ratio increases.

-- David Pierson

Photo: Chinese banks are being asked to hold record amounts of capital in reserve. Credit: Zhong Min / EPA