What If the Yuan Was Really Flexible?: WSJ China has just taken another step toward letting its currency float freely, widening the maximum daily fluctuation to 2% in either direction. In the short term, the latest move could take the yuan down a notch. Speculators have long been enamored with the currency, also known as the renminbi, seeing it as a one-way bet that can only gain in value. Last month, the Peoples Bank of China launched a surprise attack on short-term investors, diving into the market and dragging the renminbi down to sting those who had banked on appreciation. Bigger one-day swings only make that sort of bet more risky. The currency could overshoot on the weak side for a while, said Liu Li-Gang, an economist at ANZ. The PBOCs intention was to penalize speculators, and it will work. Mr. Liu expects the exchange rate to reach 6.20 or 6.25 to the dollar within the next week, compared with 6.14 now, as speculators flee the market. A higher number indicates a weaker yuan because one dollar buys more Chinese currency. The central banks official line is that the yuan is fairly valued, with no fundamental pressure in either direction. There is no basis for big appreciation of the renminbi, the bank said in an announcement as it widened the band, adding that there is no basis for big depreciation either. Many in the market would disagree. I see plenty of structural drivers pointing to strengthening, said Louis Kuijs, an economist at RBS, pointing to Chinas persistent trade surplus and investment inflows. Last year, Chinas trade surplus--the difference between exports and imports--came to a whopping $238 billion, according to the State Administration of Foreign Exchange. The country also attracted $171 billion in foreign direct investment, SAFE said, and $72 in financial inflows. All of those things put upward pressure on the currency. The only thing that could really undermine Chinas currency in the long term is capital moving out of the country. The government has strict controls on that, with residents limited to taking $50,000 abroad--plenty for shopping trips to London, but peanuts in the world of international financial flows. There are ways around that, for the enterprising. Bitcoin is an open wound in Chinas capital controls. So are the junket operations that smuggle money out through Macau casinos. But law-abiding citizens are still largely limited to the domestic property and stock markets. With Chinas stock exchange consistently among the worlds worst performers, that has meant the nations savings are largely held in real estate. If China made it easier for its citizens to invest money abroad, some of those pent-up savings would quickly flow out. With less cash chasing property, the domestic housing market could take a pummeling. So could the yuan. Mr. Liu at ANZ thinks loosening up Chinas capital controls is long overdue. The longer they wait, the harder it will be, he said. Chinas government says it wants a flexible currency and a more open capital account. But real flexibility and openness would come at a price.
Posted on: Mon, 17 Mar 2014 04:30:00 +0000
Trending Topics
Recently Viewed Topics
© 2015