Chinese Yuan Valuation

  • US Senate to move next week on China bill

    Posted: September 27, 2011 by THE CURRENCY NEWSHOUND 

    WASHINGTON — The US Senate will move forward next week with a bill to punish China over its alleged currency manipulation, Democratic Majority Leader Harry Reid said Monday, predicting the legislation will pass.

    “China trade is a jobs bill that’s been long, long overdue. It’s a bipartisan bill and I feel very comfortable we’re going to pass it,” Reid told reporters at a press conference, using shorthand for the proposal.

    Reid said that “next week” the Democratic-led chamber will “start our work on trade matters” including the legislation on China’s currency, though it was unclear when the bill would come to a final vote.

    Read More: http://bit.ly/qxzH9x


    ASIA NEWS
  • JULY 21, 2011

IMF Urges Boosting of Yuan

By BOB DAVIS

WASHINGTON—Inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in China, and Beijing should boost the value of its currency to combat those threats, the International Monetary Fund said.

The IMF used its annual review of China's economy to lay out a broad agenda of change for China—including a stronger currency, higher interest rates, reduced advantages for big state-owned enterprises and a liberalized financial sector. Such changes were necessary, the IMF argued to improve Chinese living standards and reduce conflict with its trading partners.

The IMF declared the yuan to be "substantially" undervalued. An IMF panel estimated the yuan is undervalued between 3% and 23%, depending on the methodology used.

Over the past year, the Fund estimated that the value of China's currency against all its trading partners actually fell by about 2% adjusted for inflation. Against the dollar, though, it gained about 8% after inflation over the past year.

Journal Community

The IMF review was aimed boosting those inside China, including at the People's Bank of China, who have been arguing for change, although perhaps not on as sweeping a scale. The report, though, could be used by China's many opponents in Congress and elsewhere who want the U.S. government to take a much harder line on the currency and other issues.

China's representative to the IMF, He Jianxiong, sharply disagreed with a number of IMF's conclusions—including its assessment of the currency. He said that one reason that China's reserves have grown to more than $3 trillion is that central banks in the U.S. and Europe have kept interest rates so low that capital has surged into emerging markets.

"The report fails to mention China's role as an important source of global stability and growth," Mr. He and his senior adviser, Zhang Zhengxin, wrote in a statement attached to the IMF report.

For the short term, the Fund was more optimistic about China's prospects than some other economists. It forecast that China would grow 9.6% this year and that the pace of consumer price inflation would fall to 4% by the end of 2011, from more than 6% currently.

But the IMF, like many China specialists, said fundamental change was needed for China to continue to grow strongly and for gains to be more widely shared.

The IMF seized on China's determination to keep its exchange rate from rising as a major obstacle. To keep the yuan from rising, a development that would hurt China's exports, the Chinese central bank prints a lot of yuan and uses them to buy dollars. That keeps the yuan from rising more rapidly against the dollar than markets would take it. Then the PBOC tries to "sterilize" the effect of printing all those yuan, which could produce unwelcome inflation, by forcing state-owned banks to trade yuan for low-interest government bonds instead of lending yuan out.

One consequence is that the PBOC and its superiors in the Chinese government have an incentive to keep interest rates low. If interest rates went up, those sterilization bonds would have to carry a higher interest rate, and the tab for managing the currency would rise.

But that has side effects. Bank deposit rates are set well below inflation, so ordinary Chinese put their money instead in real estate, feeding property bubbles. Big capital-intensive state-owned firms borrow at very low rates, while more labor-intensive service companies have trouble getting bank loans at any rates.

Even though China has been growing at about 10% a year since 2004, it is only adding jobs at 1% a year, the IMF reported.

Boosting the value of the yuan is a "key ingredient to accelerate the transformation of China's growth model" so it produces more jobs and reduces the advantages of state-owned firms. But winning political support for such a change is difficult in China, where exporters and state-owned firms have immense political power and ordinary Chinese households don't.

The IMF cautioned that the U.S. and Europe wouldn't be big winners from a jump in value of the yuan, at least initially. A 20% yuan appreciation would boost U.S. growth by between 0.05% and 0.07%, the IMF calculated, and the euro zone's growth by less than 0.12 %. The IMF report didn't explain why but a number of economists have argued that the vast bulk of exports that China lost would shift to other low-cost nations, not to the U.S. or Europe.

Write to Bob Davis at bob.davis@wsj.com



Bloomberg

IMF Urges Yuan Gains to Protect World From China ‘Shocks’

July 21, 2011, 2:11 AM EDT

By Sandrine Rastello and Scott Lanman

(Updates with yuan’s value in fifth paragraph.)

July 21 (Bloomberg) -- The International Monetary Fund said China should let the yuan gain to boost demand and global economic stability, citing the risk that any growth shocks in the country will hurt the world.

Currency appreciation combined with reforms to rebalance the Chinese economy “would yield substantial benefits,” the fund said in a statement late yesterday in Washington. A “major disruption in China’s so-far steady growth would have material adverse consequences,” IMF directors said.

The IMF’s stance marks a shift from last year, when directors of the 187-nation fund split over their economists’ view that the yuan was undervalued. China disputed yesterday’s assessment, while the currency rose to a 17-year high today, the sixth anniversary of the scrapping of a peg to the dollar.

“There is a growing consensus that China’s currency policy is not serving the global economy well,” Eswar Prasad, a senior fellow at the Brookings Institution and a former head of the China division at the IMF, said in an e-mail. “It complicates China’s own battle against inflation and raises the risk of an eventual hard landing there.”

The yuan touched 6.4509 per dollar today in Shanghai before trading at 6.4513 as of 1:27 p.m.

Manufacturing Contraction

China’s manufacturing may contract this month for the first time in a year, according to preliminary purchasing managers’ data released by HSBC Holdings Plc. today.

The main near-term risks are inflation, the threat of a property bubble, and bad loans after stimulus spending, IMF staff said in a report completed June 27. The economy remains on a “solid footing,” the organization’s directors said.

China disputed the IMF staff assessment that the currency is “substantially below the level consistent with medium-term fundamentals,” citing reasons including faulty current-account projections. He Jianxiong and Zhang Zhengxin, representatives at the fund’s board, also said that China’s plan to rebalance demand, including boosting wages to spur consumption, is “the most comprehensive and elaborate” put forward by any Group of 20 nation.

The IMF’s 24 directors “generally agreed that, over the medium term, a stronger renminbi would be an important component in rebalancing the economy toward domestic demand,” the fund said in a statement using another term for the yuan.

Calculating Value

The currency remains undervalued by 3 percent to 23 percent, depending on methodology, and fell against the currencies of trading partners in the past year in inflation- adjusted terms, the organization’s economists said.

China kept the yuan stable at about 6.83 per dollar from July 2008 to June 2010, after allowing it to gain 21 percent in the previous three years. The IMF didn’t give a breakdown of how individual directors viewed China’s currency.

On dangers for the banking system, including lending to local-government financing vehicles, the IMF staff said that a full assessment is hampered by “serious data gaps” and a lack of access to confidential data. They saw potential for “significant contingent liabilities.”

In a “spillover” report on China’s effects on the world, staff said rebalancing the economy including by reducing household and corporate savings rates is crucial.

Global ‘Shocks’

China increasingly has the potential to cause global “shocks” as the first or second-biggest trading partner of 78 countries with 55 percent of global gross domestic product, the report said.

Premier Wen Jiabao faces pressure to let the yuan rise from U.S. lawmakers, who claim an undervalued currency gives Chinese exporters an unfair advantage. The U.S. administration declined in May to brand the nation a currency manipulator, while describing appreciation as “insufficient.”

Yesterday’s report estimates that China’s current- account surplus, the broadest measure of trade, will widen to 6 percent of gross domestic product next year, from a forecast 5.5 percent this year and 5.2 percent last year.

Growth Forecasts

The economy may expand 9.6 percent this year and 9.5 percent in 2012, the IMF said. Inflation should slow to an average 3.3 percent next year compared with 4.7 percent in 2011, it said.

In addition to calling for yuan appreciation to support economic growth, the IMF staff report said such a policy would reduce risks in the financial system and let other improvements in interest-rate management, regulation and bond and stock markets “safely” proceed.

Without a coordinated plan, changes may be dictated by markets, which “would create liquidity stress, growing cross-border capital flows and both asset price and macroeconomic volatility,” the report said. “Given the increasing complexity of China’s financial system, an ad-hoc or poorly configured approach would be especially risky, for both China and the global economy.”

Currency Holdings

Allowing the yuan to strengthen would slow the buildup of foreign reserves and reduce the need to “use higher and higher reserve requirements” for lenders and central bank intervention to absorb liquidity, the IMF said. China’s foreign-exchange reserves rose by $153 billion to $3.2 trillion in the second quarter.

The IMF recommended changes to regulation including stress-testing of banks, tighter oversight for companies critical to the financial system and improved data quality and collection. Eventually, China should loosen restrictions on investment flows, the fund said.

China’s government responded that while it was in “broad agreement with the scope of the reforms” outlined by the IMF, setting a definitive sequence for the changes “would be difficult,” and they would be “preconditioned on a stable and supportive macroeconomic environment,” the report said.

--Editors: Paul Panckhurst, Lily Nonomiya.

%CNY %USD %JPY

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net; Scott Lanman at slanman@bloomberg.net

To contact the editor responsible for this story Christopher Wellisz at cwellisz@bloomberg.net




This report came out in the Wall Street Journal
  • JULY 20, 2011, 10:00 P.M. ET

IMF: Chinese Yuan Remains Substantially Below Fundamentals

   By Bob Davis 
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Inflation, real-estate bubbles and weak monetary controls pose "significant risks to financial and macroeconomic stability" in China, and China should boost the value of its currency to combat those threats, the International Monetary Fund said.

The IMF used its annual review of China's economy to lay out a broad agenda of change for China--including a stronger currency, higher interest rates, reduced advantages for big state-owned enterprises and a liberalized financial sector. Such changes were necessary, the IMF argued to improve Chinese living standards and reduce conflict with its trading partners.

The IMF declared the yuan to be "substantially" undervalued. An IMF panel estimated the yuan is undervalued by between 3% and 23%, depending on the methodology used.

Over the past year, the Fund estimated that the value of China's currency against all its trading partners actually fell by about 2%, adjusted for inflation. Against the dollar, though, it gains about 8% after inflation over the past year.

The IMF review was aimed boosting those inside China, including at the People's Bank of China, who have been arguing for change, although perhaps not on as sweeping a scale. The report, though, could be used by China's many opponents in Congress and elsewhere who want the U.S. government to take a much harder line on the currency and other issues.

China's representative to the IMF, He Jianxiong, sharply disagreed with a number of IMF's conclusions--including its assessment of the currency. He said that one reason that China's reserves have grown to more than $3 trillion is that central banks in the U.S. and Europe have kept interest rates so low that capital has surged into emerging markets.

"The report fails to mention China's role as an important source of global stability and growth," Mr. He wrote in a statement attached to the IMF report.

For the short term, the Fund was more optimistic about China's prospects than some other economists. It forecast that China will grow 9.6% this year and that the pace of consumer price inflation will fall to 4% by the end of 2011, from more than 6% currently.

But the IMF, like many China specialists, said fundamental change is needed for China to continue to grow strongly and for gains to be more widely shared.

The IMF seized on the China's determination to keep its exchange rate from rising as a major obstacle. To keep the yuan from rising, a development that would hurt China's exports, the Chinese central bank prints a lot of yuan and uses them to buy dollars. That keeps the yuan from rising more rapidly against the dollar than markets would take it. Then the PBOC then tries to "sterilize" the effect of printing all those yuan, which could produce unwelcome inflation, by forcing state-owned banks to trade yuan for low-interest government bonds instead of lending yuan out.

One consequence is that the PBOC [and its superiors in the Chinese government] have an incentive to keep interest rates low. If interest rates went up, those sterilization bonds would have carry a higher interest rate, and the tab for managing the currency would rise.

But that has side effects. Bank deposit rates are set well below inflation, so ordinary Chinese put their money into real estate instead, feeding property bubbles. Big capital-intensive state owned firms borrow at very low rates, while more labor-intensive service companies have trouble getting bank loans at any rates. Even though China has been growing at about 10% a year since 2004, it is only adding jobs at 1% a year, the IMF reported.

Boosting the value of the yuan is a "key ingredient to accelerate the transformation of China's growth model" so it produces more jobs and reduces the advantages of state-owned firms, the IMF said. But winning political support for such a change is difficult in China, where exporters and state-owned firms have immense political power and ordinary Chinese households don't.

The IMF cautioned that the U.S. and Europe wouldn't be big winner from a jump in value of the yuan, at least initially. A 20% yuan appreciation would boost U.S. growth by between 0.05% and 0.07%, the IMF calculated, and the euro zone's growth by less than 0.12 %. The IMF report didn't explain why but a number of economists have argued that the vast bulk of exports that China lost would shift to other low-cost nations, not to the U.S. or Europe.

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