As China’s export engine sputters, it is avoiding the seemingly simple fix of letting its managed currency drift lower to improve competitiveness, constrained by the threat of faster capital withdrawal as its economy slows.
The yuan has struck record highs this year against the euro, the rupiah and the Australian dollar, a surge that coincided with a shock 15 percent fall in Chinese exports last month.
According to Goldman Sachs, its yuan trade weighted index has jumped by 13 percent since June last year, and the currency’s strength is a key reason for China’s disappointing export sales.
Authorities are keeping the yuan stable against a strong US dollar, supporting it even as it rises higher against some other currencies.
The reluctance to weaken the currency comes after China’s capital and financial account recorded a deficit of US$91.2 billion in the last quarter of last year, and the country’s foreign exchange regulator, the Chinese State Administration of Foreign Exchange (SAFE), warned that capital flows would be volatile this year.
A weaker yuan could accelerate capital outflows, taking a further toll on economic growth, which is already expected to grind to a 25-year low this year, and SAFE has also indicated that the exchange rate could be fixed to counter shocks to the economy.
First quarter GDP figures to be released today are likely to confirm China’s “new normal” of slower growth, but policy options to help the economy are restricted by Beijing’s desire to avoid the kind of asset bubbles that followed its stimulus measures in response to the global financial crisis.
It also wants to press on with reforms that are expected to eventually make the economy more efficient, but could in the short hinder the bloated state sector.
Standard Chartered PLC Hong Kong-based strategist Eddie Cheung said China had in recent months increased its efforts to support its currency, in part to wrong-foot investors who were betting on a persistently weak yuan.
“All central banks, not just the People’s Bank of China, are worried when the market gets too one-sided, so they want to smooth out the volatility,” Cheung said.
China’s plans to internationalize its currency by lobbying for its inclusion in the IMF’s special drawing rights (SDR) basket might also have played a part in the yuan’s recent strength, Cheung said.
The SDR, an international reserve asset, currently comprises US dollars, yen, pounds and euros.
As the yuan’s value has been a bone of contention with China’s trading partners, especially the US, analysts said keeping the yuan steady against the US dollar could be an important component in China’s SDR bid.
However, some economists are skeptical that the yuan’s strength has been crimping Chinese trade, especially after accounting for distortions to the data due to the Lunar New Year holiday.
“I certainly don’t rule out the idea that it could have an impact, but I just don’t see it in the data,” Capital Economics’ Mark Williams said in London.
Chinese shipments were up 4.7 percent between January and last month, so China appears to be doing well relative to Taiwan and South Korea, where exports fell 4.2 percent and 2.8 percent respectively, Williams said.
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