SHANGHAI (Reuters) – Currency markets are taking subtle signals from Chinese authorities as a sign they are slowly pushing the yuan lower to restore export competitiveness, but analysts say a prolonged weakening of the yuan is neither the intention nor desirable.
The biggest signal of tolerance for yuan weakness has been the People’s Bank of China’s (PBOC) daily reference rate, or fixing, around which the yuan is allowed to trade.
Having used the fixing to contain the yuan’s depreciation since November, even as the currencies of trading rivals such as Japan and South Korea fell, the PBOC’s fixings have become looser and even slightly biased since mid-April, weakening the currency.
State-owned Chinese banks, which often tap markets to buy the yuan, are also less visible.
Given the nominal exchange rate, some depreciation of the yuan makes sense. It’s down about 2% against the dollar this year, but an index of its value against major trading partners has risen nearly 3%, with the Japanese yen slumping 9% and the Korean won falling 5% against the U.S. dollar. this year. that period.
“The PBOC will likely continue to allow the yuan to soften moderately against the dollar at a pace the central bank feels comfortable with,” said Tommy Wu, senior China economist at Commerzbank (ETR:). “This is especially true given that the currencies of China’s trading partners have depreciated against the dollar, which in turn has caused the yuan currency basket to rise.”
Several global investment banks expect the tightly managed yuan to fall to 7.3 per dollar in the coming months, about 1% below its current level of around 7.22.
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The modest decline reflects what most analysts suspect is that the PBOC is recognizing the risks of a weak currency while keeping an eye on trade competitiveness.
“We don’t expect to see any significant one-time devaluations; instead, we’re prepared for the currency to move gradually and weaken, but with less volatility,” said Nathan Swamy, head of FX trading at Citi.
The NBK did not immediately respond to a Reuters request for comment.
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There is little evidence that the yuan’s relative strength, despite massive capital flight from China’s anemic markets and economy, is hurting its vast export sector.
New export orders are growing, manufacturing research shows.
Notable contributions were made by the export of photovoltaic products, electric vehicles and lithium batteries, dubbed China’s “three new things”, which replaced traditional labor-intensive household appliances, furniture and clothing exports.
Their exports in 2023 amounted to 1.06 trillion yuan ($146.7 billion), up a third from the previous year.
A photovoltaic systems exporter from Shanghai, who only wanted to operate under the surname Zhu, said her business was not affected by cheaper Korean and Japanese products.
“For some products, Chinese brands dominate the market. It’s difficult for Japanese and Korean brands to squeeze in… Currency fluctuations are definitely an important factor, but I don’t see a huge impact yet,” Zhu said.
Chinese manufacturers are also seeing their costs fall thanks to deflationary forces caused by weak consumption and investment at home.
On an inflation-adjusted basis, Goldman Sachs estimates the yuan is at its weakest level since the 2008 global financial crisis.
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Consumer inflation in China hovered near zero last year.
“That in itself provides a degree of competitiveness,” said Frederic Neumann, chief Asia economist at HSBC. “So even if the currency falls to 7 (against the dollar), they will probably still be more competitive on a two- or three-year basis.”
On the other hand, the terms of trade have turned against China as prices for oil and other goods it imports remain high.
Neumann says a slight depreciation could be part of Beijing’s policy toolkit to boost input prices and provide more incentives to exporters.
But taking too much risk could hurt consumers already hurt by the collapse of real estate and stock markets. Per capita spending during the Labor Day holiday fell 11.5% from pre-COVID levels in 2019, according to Reuters calculations based on official data.
Another cause for concern is China’s dominance as an exporter.
“The problem with China is that if they devalue the currency now, they risk causing a global backlash. They are already faced with many other countries complaining about China’s growing competitiveness,” said HSBC’s Neumann.
“If you depreciate the currency a little bit, you might be able to increase export earnings a little bit, but you’re not going to increase export volumes that much. a country.”
($1 = 7.2258)