Photographer: Goh Seng Chong/Bloomberg
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The People’s Bank of China yesterday raised its yuan reference rate by the most since 2010. In doing so, strategists say it’s distancing itself from the stimulus policies of Japan and the euro region, which have resulted in the kind of currency weakness that’s attracted the ire of U.S. officials concerned about unfair trading practices.
“With the depreciation in the yen, Xi wants China to be providing some stability in an environment of general weakness,” Tim Condon, the head of Asian research at ING Groep NV in Singapore, said yesterday by phone. “It’s more about stability than strengthening.”
Whether or not a stronger currency is the goal, a higher exchange rate may
help policy makers promote the yuan as a currency of global trade to rival the dollar and euro. With Xi due to meet the U.S. president at the Asia-Pacific Economic Cooperation forum, an appreciating yuan may also help assuage American criticism that China derives an unfair economic advantage from an artificially weak currency.
‘Overriding’ Priority
China strengthened the reference rate by 0.37 percent yesterday, the most since June 22, 2010, the same year the nation ended a de facto peg with the dollar. The yuan can trade as much as 2 percent above or below that daily fixing -- near its highest level since March 19 -- with the PBOC keeping it within the range by buying or selling foreign currency.The increase will help bolster the yuan, with the consensus estimate among strategists surveyed by Bloomberg for a gain versus all but two of its 26 most-traded peers by the end of 2015. The PBOC acted after the currency fell 0.15 percent last week, its biggest decline in a month, before rising 0.08 percent today to 6.1251 per dollar in London.
“The appreciation in the yuan is important for the internationalization scheme, which I think is going to be an overriding” priority for China, Eddie Cheung, a strategist in Hong Kong at Standard Chartered Plc, which gets more than half its revenue from emerging markets, said yesterday by phone. “The PBOC is trying to send a signal through a stronger fixing.”
‘Currency Wars’
The yuan is the only major currency to climb against the dollar since mid-year. It has risen 1.4 percent, compared with losses of 9.3 percent in the euro and 12 percent in the yen. It reached an almost eight-month high of 6.1078 per dollar on Oct. 31, rebounding from a 3.5 percent slide between mid-January and early May that was engineered by the PBOC.Staying away from what some investors are calling a fresh bout of “currency wars” -- or competitive devaluations -- may also stand Xi in good stead with Obama, whose government has criticized China’s exchange-rate policy.
The U.S. Treasury Department said in a report last month China’s currency reforms were incomplete and that it should allow markets to play a bigger role in setting the yuan’s value.
The euro and yen reached two- and seven-year lows versus the dollar last week as a result of the unprecedented monetary stimulus their central banks engaged in to stave off deflation. While the heads of both banks have acknowledged the advantages of a weaker currency, they also insist their policies don’t specifically target the exchange rates.
Global Power
A stronger yuan “is needed to reduce foreign, especially U.S., criticism of China manipulating the currency,” Anthony Chan, a strategist in Hong Kong at AllianceBernstein Holding LP, which oversees $473 billion, said by e-mail on Nov. 5. He predicts a steady appreciation of about 2 percent a year.China also wants to show, through its currency, that it’s “the economic power and leader in the region,” Chan said.
The Chinese president has used the days before his meeting with his U.S. counterpart to set out his vision for a China with a greater influence in world affairs. At a gathering yesterday, Xi proposed a free-trade agreement for the Asia-Pacific region, which some economists saw as a response to the U.S.-backed Trans-Pacific Partnership that excludes China.
China has made strides in encouraging international use of the yuan. It started direct trading between its currency and Singapore’s dollar last month, and similar links exist for the dollar, euro, yen and U.K. pound.
Improved Economy
The yuan’s share of the money transferred around the globe rose to a record 1.72 percent in September, making it the world’s seventh most-used currency, according to the Society for Worldwide International Financial Telecommunications.Advances in the yuan also reflect improvements in China’s economy that may suggest authorities are comfortable with its appreciation.
As recently as last month, strategists from firms including Barclays Plc and Royal Bank of Canada warned that six straight months of gains in the yuan -- its longest rally since 2011 -- threatened to make exports less competitive and tested China’s resolve to take a more hands-off approach to the exchange rate.
Reforms such as doubling the yuan’s trading band earlier this year were in jeopardy, they said.
Data published over the weekend put some of those concerns to rest. They showed exports rose more than estimated in October, helping push the trade surplus to $45.4 billion, compared with an all-time high of $49.85 billion in August.
“The trade data demonstrated China’s exports outlook is improving, which eased concerns over external headwinds on economic growth,” Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd., said in a phone interview yesterday.
China’s also letting the yuan strengthen “to create a friendly atmosphere for the Obama-Xi meeting,” Lai said.
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