Tag Archives: The Chinese yuan

The Decline of Yuan

Since last week, China’s central bank, People’s Bank of China, has been working on deprecating the value of the country’s currency, yuan. It says that the government is trying to eliminate the speculations on rising yuan as well as allow a wider trading range for the currency. In order to do that, PBOC is setting a weaker benchmark against which the yuan can trade, according to Wall Street Journal, which has a very obvious effect on the market. Last Tuesday, one dollar is equivalent to 6.11 yuan, increasing from 6.098 yuan a day ago. Since the beginning of this year, the currency has dropped 1.2% against dollar. At the same time, PBOC is buying more currency from other countries to depreciate the value of yuan. This process has been continued since last year and last December 45 billion dollars worth of foreign currency was purchased by Chinese banks.

The decline of yuan is beneficial to Chinese economy. The value of the currency has increased steadily during last 4 years. In May 2010, one dollar was worth of 6.83 yuans, compared to the lowest point about 6.04 yuans at the end of last year. The increasing yuan attracted enormous capital to China’s market, but this might not be a good thing. The influx of foreign capital worsened the China’s economy by increasing the property prices and made it even more difficult for the government to regulate the market.  Therefore, a lower value currency could benefit the economy by squeezing out the “hot money” inflows. Moreover, we could also expect a better performance of the export. Since the yuan’s value is lower, Chinese products would become relatively cheaper and therefore more competitive in the global market.

However, the decline in yuan also raises concerns among investors. Some of the term structure products that betting on increasing yuan could bring lost to their owners. Since China allowed trading of its currency in 2010, the derivative market increases at a fast speed. Accoding to Deutsche Bank, the worth of executed contract has reached 250 billion dollars. Lots of financial institutions, especially foreign exchange hedge funds use yuan to hedge their risks because the trend of appreciation was so clear. “It was like free money, ” said Greg Matwejev, director of hedge fund of Newedge Group SA. Although the recent depreciation would cost a big lost, the expectation of further decrease would cause a huge disturbance in this derivative market. Not only hedge funds, some export companies also brought derivatives to manage the risk of yuan’s appreciation. In the past few years, their investment in derivatives compensated their lost caused by increasing yuan.

In a word, the decline in yuan would help Chinese economy to get rid of the effect of “hot money” and reduce the heat of investment. On the other hand, it could also become a lost to the investors who bet on increasing yuan to make money.

Why Should We Care About Yuan’s Decline

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In the past week, the People’s Bank of China has been guiding the yuan lower against the dollar – by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars. According to Wall Street Journal, China’s central bank engineered the recent decline in the country’s currency to shake out speculators as it prepares to allow a wider trading range for the tightly tethered yuan.

It wasn’t market forces or traders behind the move, but that the Chinese central bank was deliberately pushing the currency lower. For a very long period of time, the yuan was long seen by investors as a currency that was only going up. Why was the Chinese central bank doing this?

Every day, the yuan trades within a tight range set by the central bank every day. However, short-term traders and increasing demand is almost constantly pushing the currency higher within that range. Therefore the central bank is trying to bluff away these traders. In this sense, fewer speculators will trade the yuan, China now hopes to have an easier path to widen the yuan’s trading range further. In the much longer term, this will make the yuan a free-floating currency that’s driven only by economic and market forces. PBOC officials have said in the past that the yuan is nearing its fair-market value, or “equilibrium level,” meaning the chances of any drastic movements in the currency are limited.

I believe that this would be a great step for China – free its currency in the long term. A freer yuan may also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan, allowing it to rise in value and boost Chinese consumer demand. The free trade of currency will open up a wide door for the yuan to become much more prominent in trade and payments across the globe. More importantly, in my understandings, a freely convertible currency also makes the yuan a more attractive option for other central banks’ stockpiles of cash, also known as their foreign exchange reserves. The current situation is that U.S. dollar dominates the currency market as the number-one reserve currency in the world. This perfectly explained why so many central banks hold U.S. government bonds even when the U.S. economy was in recession.

 

 

 

Is Yuan going to raise?

Chinese Yuan raises again. Starting from mid-February, the dollar-Yuan exchange rate increased from below 6.06 to 6.10. I think that this change reflects the trends of Yuan and dollar in the future, Yuan will depreciate while dollar will appreciate. This changes in the exchange rate is backed by several reasons.

First, expected real estate market collapse in China. It is well known that China’s real estate market has a problem ever since 2008, the over investment leaded by the government and pushed by lots of big real-estate developers raised the price of Chinese houses rapidly and made them unaffordable to ordinary people. The demand for high-price houses is far lower than the supply, the bubble was already formed and kept increasing over time. At the end of 2013, LI Ka-shing, the richest tycoon in Hong Kong surprisingly withdraw from the Chinese property market, which is interpreted by some investors as the signal for the bubble to burst. The crashing down of the Chinese real estate market will bring China’s economy into big recession, which will lead to the dramatic depreciation of Chinese Yuan. So it is possible for international investors to quit Chinese market and waiting for the day.

Second, the tapering in US leads to capital withdrawal from developing countries and return to the US, which means more demand for dollar in US. And this will definitely appreciate dollar and make it relatively expensive compares to Chinese Yuan. The market is estimating that Fed will raise the rate in the foreseeable future, no matter what, the signal sent by the Fed will change the investors’ actions, which means the demand for US dollar will raise in the near future and this appreciates dollar in terms of Yuan. According to this WSJ article, tapering could lead to the stop of increasing in Hong Kong’s property prices. Once the prices of property in Hong Kong stop increasing, it will also change the price estimation in the China mainland, and then makes the investment in China not so promising. Eventually, investors will quit investment in China and depreciate Yuan.

And there is another reason why the raising in Yuan could be reasonable. China’s center bank is known to manipulate its exchange rate in order for Yuan to keep a relative advantage to increase the country’s export. In the past few years, China is required by US to appreciate its currency in order to inverse the trade decifit of US. However, China is always want to depreciate Yuan. According to this article in the WSJ, Chinese center bank catches the opportunity when the dollar is raising, it depreciated Yuan in order to increase export and improve the GDP.

Anyway, the market determined that dollar should raise and Yuan should be depreciated in the future, we can expect further news about this.

The Future of the Chinese Currency

The Chinese yuan dropped to a four-month low today as global investors are retreating from bets on its further appreciation, fueling speculation that years of gains may be nearing an end. Relatively, the yuan’s slide is having ripple effects on currencies in other Asian nations with close trading ties to China. The South Korean won hit its lowest level in more than two weeks against the U.S. dollar. The currencies of Singapore and Taiwan also had heavy selloffs last week.

So what caused the slide in the yuan’s value, given that the currency has been strengthening steadily against its major counterparts for years?

The first reason is a slowdown of economic growth. The yuan’s appreciation was underpinned by China’s strong economic growth in the past few years when investors poured money from the U.S. to emerging markets seeking for higher rates of return. In terms of absolute rate, the nation’s GDP growth fell to 7.7 percent in 2013, a figure significantly below those double-digit growths in previous years.

The second one is the uncertainty about structural reform going forward. The new administration is committed to more sustainable expansion in the country’s overall economy, and liberalization of exchange rate is a critical part of financial reform. But the challenging part is, if the financial reform is implemented ahead of the rest in the new expansion package, it would increase the risk of higher leverage and lead to even more reliance on property and investment, given that Chinese banks’ nonperforming loan ratio rose to 1% at the end of the latest quarter from 0.97% at the end of September, which was the highest since the end of 2011, and developers in two cities in eastern China had started to cut prices of new homes last week in a bid to spur sales, triggering concern about a potential collapse in the property market. In addition, the fact that the government continuously cracks down corruption and curbs speculation in the housing sector might particularly damp growth momentum in the short run.

The third one is a shift in the Chinese central bank’s policy. Currently, the Chinese yuan is only allowed to exchange with the US dollar within a band of 1 percent, up or down, set by the People’s Bank of China on a daily basis. In 2013, China’s capital- and financial-account, a measure of how much money foreign investors poured into the country, outweighed its current account, representing mainly trade payments, due to speculative capital inflows. So the central bank aims to increase the flexibility of the yuan in order to increase the cost of such speculation and ensure financial stability in the long run.

In conclusion, I think the Chinese yuan will continue its path of appreciation, despite the volatility may increase as the central bank gradually allows markets to determine the currency’s value with a long-term vision.