Tue, Apr 26, 2011 page10

• Big Mac Index suggests yuan discounted 40%

  • Bloomberg
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  China’s yuan and the Hong Kong dollar are the most undervalued currencies in the world, trading at discounts of 40 percent or more versus the US dollar, based on the relative cost of McDonald’s Corp’s Big Mac hamburgers.

  McDonald’s signature burger cost the equivalent of US$2.18 in China at the end of last year, US$1.90 in Hong Kong and US$3.71 in the US, according to The Economist’s Big Mac Index.

  China’s discount has narrowed to 40 percent from 41 percent since then owing to yuan gains, while Hong Kong’s pegged currency has kept its gap at 49 percent, according to data compiled by Bloomberg.

  Steven Barnett, deputy division chief in the Asia-Pacific department of the IMF, said last month the yuan is “substantially below levels consistent with medium-term fundamentals” and US Senator Charles Schumer estimated in January the currency was undervalued by as much as 40 percent.

  “It is quite clear that the yuan is undervalued,” said Gavin Redknap, an emerging-markets strategist in London at Nikko Asset Management Co, which oversaw US$126 billion of assets at the end of last year. “Most tellingly, the PBOC [People’s Bank of China] continues to accumulate foreign-exchange reserves, which is by definition a clear indication that the yuan would be significantly stronger were the Chinese authorities not influencing its value.”

  The PBOC purchases US dollars to limit yuan gains, a policy that drove a US$197 billion jump in the nation’s reserves to a record US$3.04 trillion in the first quarter.

  Local currency issued to soak up capital pouring in is flooding the financial system with cash, driving Chinese government bond yields lower this year even as interest rates were raised twice and lenders’ reserve-requirement ratios increased by 2 percentage points.

  People’s Bank of China Governor Zhou Xiaochuan (周小川) said on April 18 China’s foreign reserves have exceeded a “reasonable” level and are making it harder to conduct operations to control money supply.

  Twelve-month non-deliverable forwards were 2.8 percent stronger at 6.334 yuan per US dollar, near the biggest premium since November last year, data compiled by Bloomberg showed.

  The Chinese Ministry of Commerce said on Friday that there is “relatively large” pressure for the yuan to appreciate, noting that currency gains have had some impact on export orders. The country’s imports exceeded overseas sales by US$1.02 billion in the period from January to last month, the first quarterly trade deficit in seven years, customs bureau data showed on April 10.

  “There won’t be any one-off move in the foreseeable future, especially when the trade surplus is narrowing,” said Liu Dongliang (劉棟樑), a Shenzhen-based senior analyst at China Merchants Bank Co (招商銀行), the country’s sixth-largest lender by market value. “A one-off revaluation would devastate China’s exporters.”

  Rajeev de Mello, head of Asian investment in Singapore at Western Asset Management Co, said he raised his forecast yuan appreciation this year to as much as 5 percent from a maximum 4.5 percent after last month’s inflation data was released on April 15. Consumer prices rose 5.4 percent from a year earlier, exceeding the median estimate of 5.2 percent in a Bloomberg News survey.

  “Higher-than-expected inflation will probably lead to faster appreciation because a stronger yuan will help ease imported inflation,” De Mello said.

  The Big Mac Index compiled by London-based The Economist uses the theory of purchasing power parity, the concept that the US dollar should buy the same amount in all countries. Over time, exchange rates should move toward a level that equalizes the price of an identical basket of goods and services. The magazine’s “basket” compares prices of the Big Mac, which is produced in about 120 countries.

  McDonald’s said it raised prices by an average 2 percent on Thursday in Hong Kong to reflect higher wages, the Hong Kong Economic Journal reported on Friday. The world’s largest restaurant company hasn’t raised prices in its stores in China this year, according to an e-mailed statement from McDonald’s press office in Shanghai on Friday.

  China aims to double workers’ wages by the end of 2015 through annual increases of 15 percent, the China National Radio reported April 19, citing Human Resources and Social Security Vice Minister Yang Zhiming (楊志明).

  “The yuan’s undervaluation on a real effective exchange rate basis will continue to be eroded by both nominal appreciation versus the [US] dollar as well as higher inflation than China’s trading partners as a result of the higher wage increases,” said Edwin Gutierrez, a portfolio manager at Aberdeen Asset Management PLC in London.

  He predicts China’s currency will strengthen 5 percent to 7 percent this year.
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