SHANGHAI (Reuters) – Currency markets are reading subtle signals from Chinese authorities as an indication they are slowly pushing the yuan lower to regain export competitiveness, but analysts say prolonged weakening of the yuan is neither intended nor desirable.
The biggest signal of tolerance for a weaker yuan comes from the People’s Bank of China (PBOC) daily reference interest rate (fixing) around which the yuan is allowed to trade.
After using the determination to stem the yuan’s decline from November even as the currencies of trading rivals such as Japan and South Korea plunged, the PBOC’s determinations have become less rigid since mid-April and even somewhat focused on weakening the currency.
Chinese state-owned banks, which regularly enter the markets to buy the yuan, were also less noticeable.
Based on nominal exchange rates, some yuan depreciation makes sense. This year the currency is down about 2% against the dollar, but an index of its value against its major trading partners is up almost 3%, given the Japanese yen’s sharp 9% decline and 5% decline of the Korean won against the dollar in 2014. that period.
“The PBOC will likely continue to allow the yuan to soften modestly against the dollar at a pace the central bank is comfortable with,” said Tommy Wu, senior China economist at Commerzbank (ETR:). “This is especially true as the currencies of China’s trading partners have depreciated against the dollar, which in turn has increased the yuan’s basket of currencies.”
Several global investment banks expect the tightly managed yuan to fall to 7.3 per dollar in coming months, about 1% weaker than current levels around 7.22.
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That’s a modest decline, reflecting what most analysts suspect is the PBOC’s awareness of the risks of a weak currency while keeping an eye on trading competitiveness.
“We do not expect significant one-off depreciations, but a willingness to allow the currency to move gradually and weaken the currency, but with lower volatility,” said Nathan Swami, head of foreign exchange trading at Citi.
The PBOC did not immediately respond to Reuters’ request for comment.
REDUNDANT
There is little evidence that the relative strength of the yuan, despite massive outflows from China’s bloodless markets and economy, is hurting its vast export sector.
New export orders are increasing, production surveys show.
Exports of photovoltaic products, electric vehicles and lithium batteries, also called China’s “three new things” that have replaced the traditional labor-intensive household appliances, furniture and clothing exports, have made a notable contribution.
Their exports reached 1.06 trillion yuan ($146.7 billion) in 2023, a third more than a year earlier.
A Shanghai-based photovoltaic exporter, who asked to use only her surname Zhu, says her business is not under pressure as Korean and Japanese products become cheaper.
“For some products, Chinese brands have dominated the market. It is difficult for Japanese and Korean brands to squeeze in… Currency fluctuations are certainly an important factor, but I don’t see a huge impact yet,” Zhu said.
Chinese manufacturers are also seeing their costs fall thanks to the deflationary forces of weak domestic consumption and investment.
Adjusted for inflation, the yuan is at its weakest since the 2008 global financial crisis, according to Goldman Sachs estimates.
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Chinese consumer inflation has hovered at near zero over the past year.
“That alone creates a degree of competitiveness,” said Frederic Neumann, chief Asia economist at HSBC. “So even if the currency went to 7 (relative to the dollar), they would probably still be more competitive over a two or three year period.”
On the other hand, trade conditions have turned against China as prices of oil and other commodities the country imports remain high.
Neumann says some currency devaluation could be part of Beijing’s policy toolbox to raise the prices of manufacturing inputs and give exporters a little extra incentive.
But too much risk is hurting consumers already scarred by the collapse of the real estate and stock markets. Per capita spending over the Labor Day holiday fell 11.5% from pre-COVID levels in 2019, according to Reuters calculations based on official data.
Another concern is China’s dominance as an exporter.
“The problem in the case of China is that if they devalue the currency now, they risk triggering a global backlash. They are already confronted with many other countries complaining about China’s increasing competitiveness,” said HSBC’s Neumann .
“If you depreciate the currency a little bit, you might help export margins a little bit, but you won’t increase your export volumes that much. So there’s a limited benefit from a depreciation here than from a little depreciation.” country.”
($1 = 7.2258 )
