miércoles, 19 de agosto de 2015

miércoles, agosto 19, 2015


China Yuan Fall Won’t Ease Pressure on Economy

Beijing’s delicate currency adjustment leaves a great deal of room for things to go wrong

By Aaron Back
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Shockwaves from China’s yuan devaluation will be felt by all kinds of investors, and will likely prompt questions from U.S. politicians. Heard on the Street’s Aaron Back and Abheek Bhattacharya discuss. Photo: Reuters


Beijing is hoping that a more flexible currency will help stabilize China’s sputtering economy. But this monetary high-wire act carries enormous risk.

In a shock move, China on Tuesday set the yuan’s central parity, the rate around which it is permitted to trade against the U.S. dollar, 2% lower. The People’s Bank of China also said it will base the daily rate more on market conditions, a heavy hint that the currency will be allowed to fall further.

This will take some pressure off Chinese exporters. The yuan has been basically fixed against the U.S. dollar since March, but it has appreciated against other global currencies, eroding competitiveness.

Chinese imports have been even weaker than exports, though, largely due to falling commodity prices. As a result, China’s trade surplus in the first seven months of the year actually doubled, to $306 billion. This suggests the trade balance wasn’t the primary motive for the currency move.


Rather, a more flexible exchange rate seems intended to solve a classic monetary-policy dilemma. To restore a weakening economy, China has been easing, cutting benchmark interest rates four times since November. This has lowered the return on yuan assets relative to other currencies, pushing investment money out of China.

In the first half of the year, China had net capital outflows of $162 billion, according to its official balance-of-payments data, though some economists figure the true number is higher.

The PBOC has been injecting money into the system, but the capital leakage dilutes the effectiveness of its easing measures. Defending the currency also means spending foreign-exchange reserves. With the Federal Reserve likely to start raising interest rates this year, this situation is only set to intensify.

In theory, the dilemma can be resolved by letting the yuan depreciate to a low enough level that it entices money back into China. But Beijing’s long-standing preference for gradualism means it is unlikely to allow the currency to adjust so quickly. Rapid depreciation would also risk a wave of defaults on Chinese companies’ dollar-denominated debts, which Daiwa economist Kevin Lai estimates could be as high as $3 trillion.

Dragging out the adjustment also carries risks, though. If the yuan is expected to keep depreciating over time, it will only further encourage capital outflows. In its statement, the PBOC hinted that it will crack down on “suspicious cross-border capital flow.” But China’s controls today are too porous to stop large volumes of capital from going where it wants.

Markets will now have to sort out the winners and losers from China’s new currency policy. A weakening yuan will most obviously be negative for anyone dependent on exporting to China. This includes commodity and energy producers, as well airlines, hotels and retail outlets that have benefited from the surge of Chinese outbound tourism.

China has decided you should get more yuan for your dollar.China has decided you should get more yuan for your dollar. Photo: Bloomberg News


Many analysts had expected that China would keep the yuan stable against the dollar to facilitate its recognition as an official reserve currency by the International Monetary Fund. In retrospect, this reasoning was flawed. All the other currencies in the so-called Special Drawing Rights basket are free-floating. And at the end of the day, getting into a largely symbolic currency club is less important than getting the fundamental monetary policy framework right.

In a perfect world, China would have moved toward a more flexible exchange rate regime years ago, when the economic environment was more favorable. But it wasn’t to be. Now Beijing will have to manage a delicate currency adjustment in the face of Fed tightening, a weak domestic economy and a volatile Chinese stock market. That leaves a great deal of room for things to go wrong.

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