Yuan ignores weak exports to rise again as reformers stick to their guns
(Updates to midday, adds background, tables) SHANGHAI, Oct 14 (Reuters) - China's central bank set the yuan's official guidance rate at a record high on Monday morning, shrugging off weaker-than-expected monthly exports in September, as regulators stick to their currency reform guns even as concerns rise the yuan's strength is impacting export competitiveness. The People's Bank of China (PBOC) fixed the yuan midpoint - the rate from which the traded rate is allowed to diverge by 1 percent in either direction - at 6.1406 per dollar at the market open, the highest it has been since China created its domestic foreign exchange market in 1994. The setting contrasted sharply with export data, which posted a year-on-year decline of 0.3 percent in September, confounding market expectations for a rise of 6 percent and marking the worst performance in three months. The spot market also rose but remained well shy of its previous record high, with the spot yuan changing hands at 6.1157 percent at midday. This continues a trend that began in mid-August, when traders began reporting consistent dollar-buying by major state-owned banks, which effectively held back the yuan exchange rate from appreciating regardless of where the midpoint was set. This has caused the traded yuan to flatten out within an exceedingly tight range, and traders said they suspect the phenomenon is the result of the PBOC indirectly meddling in the market through major banks in order to maintain rate stability. Economists also speculate that by raising the midpoint while keeping the spot price frozen, the PBOC may be setting the stage to widen the trading band and allow more volatility and risk into the market, seen as another way to discourage currency speculation by Chinese firms that continue to regard the currency as a one-way bet on appreciation.
REFORMERS VERSUS EXPORTERS A similar surprise export dip occurred in June, and economists suggested at the time that the yuan's strength was in part to blame. The yuan has remained near record highs since then, up 1.87 percent so far this year, and has also risen in trade-weighted terms every month since Sept 2012 until it finally declined slightly in August, according to data from the Bank for International Settlements (BIS).
BIS data for September should be released later this week. However, economists have cautioned about reading too much into trade data after speculative hot money inflows chasing a steadily rising yuan artificially inflated export figures in late 2012 and early 2013; some have argued that the June and September declines were both lower than they should have been due to statistical meddling by regulators and by distorted base effects. Louis Kuijs and Tiffany Qiu of Royal Bank of Scotland said in a research note distributed on Monday that speculative inflation of the Sept 2012 export figures had effectively knocked about 2 percentage points off Sept 2013's number. "The underlying picture is not as bad as the headline data suggest," they wrote, estimating September's actual export growth at 1.7 percent year-on-year once last year's distortions are subtracted. Even so, most economists believe that the central bank is unlikely to allow much more appreciation in the yuan. "The PBOC might regret allowing RMB/USD to appreciate on strong export growth between late 2012 and April 2013," wrote Lu Ting, economist at Bank of America Merrill Lynch, in a research note. "With the incoming weak headline yoy exports data, they will have strong backing not to move the RMB/USD fixing higher." The PBOC's policy toward the exchange rate has become increasingly controversial as it has pitted the short-term interests of China's export sector, a major economic driver, against the wider long-term national interest in economic restructuring. "Practically speaking, domestic businesses don't hope for more rises to the yuan, because exports are still really weak, and if it keeps rising the results could be really ugly," said a forex trader at a European bank in Shanghai. "But in terms of the internationalisation of the yuan, you can't devalue it either," he added. In the first half of 2012, when the yuan slid as much as 1.6 percent against the dollar in reaction to the Greek debt crisis, the offshore yuan's popularity took a substantial hit as traders and investors moved out of the currency. Chinese reformers also see a stronger yuan as key to migrating China to an economic model focused on producing more higher-quality goods and selling them to domestic consumers, instead of churning out low-grade exports competing only on price. A stronger domestic currency would also reduce the need for China to maintain its massive dollar reserves, a byproduct of PBOC intervention conducted to hold down the yuan's exchange rate, and could also reduce inflationary pressure by making imported goods (commodities in particular) cheaper. This policy has come under increasing criticism as the dollar has slid in relative value thanks to monetary easing by the U.S. Fed, and at the same time confidence in the U.S. political system's commitment to its outstanding debt obligations has waned as the ongoing budget impasse drags on. On the other hand, China's economic restructuring is not yet complete - in fact, economic data so far has shown little evidence of change in the underlying drivers of growth - and export-focused businesses also remain major employers.
The onshore spot yuan market at a glance:
Item Current Previous Change PBOC midpoint 6.1406 6.1458 +0.08% Spot yuan 6.1158 6.1206 +0.08% Divergence from -0.40%
Spot change ytd +1.87% Spot change since 2005 revaluation +35.33%
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The offshore yuan market at a glance:
Instrument Current Difference from
Offshore spot yuan 6.1071 0.14%* Offshore non-deliverable 6.1505 -0.16%**
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
(Additional reporting by Chen Yixin; Editing by Neil Fullick)