MONETARY POLICY
they have to be careful: the risk is that a controlled depreciation could morph into uncontrolled capital outflows.
Most emerging markets have experienced significant outflows since Ben Bernanke’s tapering hint last May, and China has not proven itself immune: it had outflows in the first three quarters of 2012 (between QE2 and 3) and then again briefly last
summer.
And they are starting again. China’s economic fundamentals are weaker now than in 2012. While it is true that
a ut h o r it i e s have
Chinese enough
ammunition to prevent a Turkey- style meltdown (capital controls and reserves), s u s ta i n ed outflows can make management of domestic liquidity much more difficult. Also, the authorities’ main fear is always the possibility of social unrest. Te most common cause of dissent in recent years has been inflation. Reducing people’s spending power by weakening the currency will not go down well - sustained depreciation of Yuan meaning rising import costs – and isn’t an option they would consider. Besides, if we did
The risk is that a controlled depreciation could morph into uncontrolled capital outflows
shake out speculators and introduce some volatility. Still the fall of the currency can run for a few more percentage points (which is a lot for Yuan) and weeks.
Looking beyond the short-term horizon, it is well possible that the structural surplus in the balance of payments could resume gains once again for the Chinese currency. Nonetheless, I believe that in an economy where policy-makers are ready to accept
have a disorderly episode of capital flight, one sure-fire way to stop the rot and instil confidence would be to stabilize/ strengthen the currency. It is symbolic and I believe they would take that option. Te current weakening push has been steered in order to change the ‘one way’ mindset,
FX
a much more moderate, but sustainable, growth to avoid serious mishaps in a dangerously leveraged financial system, the easy gains for the Chinese currency are already behind us and that the risk/ reward for this bet is now much less attractive.
C h i n a ’ s currency
has
come of age As it
has been
recently brilliantly s u mm a r iz e d from Stuart Kirk (previously editor of the FT Lex Column and now producing 140 words snapshots for Deutsche Bank in a weekly column called “db140 w e e k en d er ” ) : “China’s currency has come of age. Amid the din over its biggest fall since liberalisation in 2005 no one seems to be sure whether the renminbi is actually
under or overvalued anymore - just as with grown-up currencies! Tis marks a big change. A rising yuan has long been taken for granted thanks to trade surpluses, capital inflows and the necessity of central bank intervention. But as Beijing looks towards full convertibility this consensus is being questioned… Welcome, renminbi, to troubled adolescence.”
Alessandro Balsotti FX TRADER MAGAZINE April - June 2014 21
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92