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May 13, 2013

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Home » Business » Finance Special

Yuan's baffling rise: a sign of hot money?

SINCE April 1, China's yuan has hit new record highs against the US dollar more than 10 times, and analysts are scrambling to understand why.

Last week, the yuan touched 6.1336 to the US dollar on the spot market, its strongest showing since China unified official and market-exchange rates at the end of 1993.

The official and market rate have both strengthened around 1.5 percent so far this year, five times the annual appreciation last year.

Were Chinese policymakers deviating from their past course of slow but steady appreciation of the currency when the reference rate hit a record 6.1925 last week?

Analysts said economic conditions alone don't warrant a faster pace of yuan appreciation.

China's economic growth may still exceed the world's average, but most recent GDP and manufacturing data fell below expectations.

China still boasts relatively high deposit rates in a world awash with low interest rates and swelling supplies of money.

April trade data released last week in China led some analysts to suggest that foreign speculative money is accelerating the appreciation of the yuan. They said overseas capital is sneaking into China disguised as trade settlements, taking advantage of higher deposit rates and a reheating property market.

China's top customs office said on Thursday that exports in April rose 14.7 percent from a year earlier, exceeding March's 10 percent gain and economists' predictions of a 9 percent increase.

The data showed that shipments from Chinese mainland to Hong Kong accounted for 21 percent of the trade volume, rising above a normal average of between 15 percent and 17 percent.

Chen Haofei, a researcher with the Bank of Communications, said foreign capital may be entering the mainland through Hong Kong, exaggerating trade volumes.

"As major economies such as Japan, the US and Europe undergo weak recoveries, there is not likely to be such great demand using Hong Kong as a transition," Chen said.

Liu Ligang, an economist with Australia & New Zealand Bank, said the export data were inconsistent with a slowdown of port activity and a decline in the index that tracks new orders. That may signal "hot money" coming into China.

Data released by the central bank also showed traces of increasing inflows of foreign capital. China's financial institutions extended 1.2 trillion yuan in funds to purchase foreign exchange in the first three months of this year, a 50 percent rise over the whole of 2012. The central bank's foreign capital assets expanded by more than 940 billion yuan in the first three months.

Zhong Zhengsheng, an analyst with Everbright Securities, attributed the growth partly to corporates selling foreign-exchange holdings accumulated when the yuan weakened for a period last year. Orient Securities blamed the inflow on "hot money."

Consumers are mostly happy about the yuan's appreciation. That makes goods from Hong Kong and elsewhere in the world cheaper than before.

However, the quickening appreciation of the yuan has exporters worried.

Wendy Jin, who works in finance for a clothing trade company in Shanghai, said her company is considering opening a US dollar account in Hong Kong to maximize their earnings from trading partners reluctant to settle in yuan.

Moreover, some economists warn against financial instability if the yuan rises too fast. Market watchers are left wondering if the central bank will let the current situation persist.

"Generally speaking, momentum of trade is not as strong as headline data showed, and China's central bank should not allow excessive appreciation of the yuan," said ANZ's Liu.

He added that strong yuan appreciation does not serve the interests of China. Policymakers who want to lift the efficiency of financial markets, he said, should be focusing on accelerating domestic financial reforms, such as interest rate and banking deregulation.

Moving slowly

Monetary authorities are moving slowly in that direction.

The State Administration of Foreign Exchange (SAFE) has stepped up measures to monitor cross-border money flows, and the market is expecting it may widen of the trading band between the yuan and the greenback.

Last week, the administration released new capital requirements, effective from the end of June, to limit banks' net sales of foreign exchange and tightened scrutiny over money transfers by banks and companies - moves interpreted as taking aim at distorted trade data.

The offshore yuan market in Hong Kong responded with the biggest daily decline in 15 months, sending the rate to as low as 6.1790 per US dollar. Banks bought more dollars to meet the new foreign-exchange requirement.

But the slump didn't last long. The offshore yuan recovered to the 6.13 level, stronger than the currency was trading in Shanghai.

"I think the new SAFE regulation is aimed more at monitoring cross-border money flows than at crushing incoming hot money," said Chen Li, head of China equity strategy at UBS Securities.

He said that money inflows will be more uncertain in the coming months as Japan emerges as a big market for profit-taking after a series of monetary stimulus measures there.

"There may be a less frantic money inflow than we have seen in the past four months," Chen said. "The authorities need to wait and watch whether there is really the need to take measures against hot money."

Standard Chartered Bank economists said they believe that China's central bank will allow more flexible trading of the yuan as the foreign-exchange market balances in the coming months.

People's Bank of China Deputy Governor Yi Gang said at the International Monetary Fund meeting in Washington last month that he expects the trading band between the yuan and US dollar to be widened "in the near future."

"The international context and nature of these remarks suggests a fair chance of a band widening ahead of the Strategic Economic Dialogue meeting between China and the US in Washington in the second week of July," according to a note from Standard Chartered. "But we expect a better-than-even chance it will happen before end of the third quarter."




 

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