Reuters: US Dollar Report: CHINA MONEY-Yuan depreciation a realistic possibility

Reuters: US Dollar Report Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com

CHINA MONEY-Yuan depreciation a realistic possibility May 23rd 2012, 09:17 Wed May 23, 2012 5:17am EDT * Euro zone crisis worse than expected, dollar jumps * China economy, including foreign trade, hit hard * PBOC signals tolerance of measured depreciation By Lu Jianxin and Pete Sweeney SHANGHAI, May 23 (Reuters) - Yuan traders are reconsidering a widely-held assumption that the currency would appreciate 2-3 percent this year as an unexpected worsening of global economic conditions and a slowdown in China drives investors toward safer havens. A debt crisis in the euro zone has of late developed into a political problem as well, with risk aversion driving the dollar index to its highest since September 2010 on Wednesday, casting doubt on whether Beijing can afford to let the yuan to continue to strengthen against the dollar. More significantly, China posted a stream of weak economic data for April, which caused the People's Bank of China (PBOC) to hastily reduce banks' reserve requirement ratios, injecting liquidity into the economy. The news and the ensuing cut exacerbated concerns over the health of the world's second-largest economy. As a result, traders say banks and their clients started to erect yuan short positions during the dollar rally this month. "While the PBOC may not let the yuan to depreciate sharply, moderate depreciation could increasingly be a choice for the government to deter the deterioration of China's exports," said a senior trader at a European bank trading at the China Foreign Exchange Trade System (CFETS) in Shanghai. The PBOC has already signaled that it will tolerate a measured relaxation of the yuan through the officially set midpoint exchange rate. Over the last eight days, the PBOC has consecutively relaxed the midpoint fixing, weakening the official rate by 0.26 percent. But at the same time, the central bank has kept the midpoint above the spot rate, which some traders interpret as a signal that it intends to keep the exchange rate relatively stable and not permit any sharp decline. In the medium run, the central bank will decide on the yuan's direction based on economic events and thus could potentially allow the yuan to depreciate by the end of this year, according to a private survey of eight China-based traders. The yuan could fall or rise up to about 2 percent in 2012, to trade between 6.46 and 6.2 against the dollar by the end of the year, said the traders, a stark contrast to an overwhelming view for yuan appreciation seen at the beginning of this year. The traders are not authorised to have their names and organisations to be put on record according to company rules. MEASURED DEPRECIATION Spot yuan is trading around 6.33 per dollar on Wednesday, having dropped 0.6 percent so far this year. And the currency's real effective exchange rate (REER), which indicates its value against a trade-weighted basket after adjustments based on inflation, fell 0.53 percent for the year through April, according to the latest data issued by the Bank for International Settlements (BIS) issued last week. A sharply depreciating yuan could divert funds from China and may ended up adding pressure to growth, traders said. Growth in China's gross domestic product slowed to a near three-year low of 8.1 percent in the first quarter. Many economists now believe the growth of the world's second-largest economy could fall below 8 percent in the second quarter. At the start of this year, many economists forecast that 8.5 percent growth for China for this year would severely startle markets. "There are so many surprises on the macroeconomic front recently that it will no longer be a surprise if the yuan closes the year with a slight depreciation," said a dealer at a North American bank in Shanghai. INFLOWS SLOW Among a slew of weaker data, weakening foreign trade was particularly striking as it signaled slower capital inflows into China. Such a slowdown is relieving appreciation pressure on the yuan and reducing the need for the PBOC to intervene in trading to prevent the yuan from rising as it has been done for most of the time over the past decade. Last week, the PBOC reported that it and Chinese financial institutions sold a net 60.6 billion yuan ($9.6 billion) in foreign exchange in April, suggesting that Chinese companies are increasingly retaining dollars on hand. Until the fourth quarter of last year, the PBOC and commercial banks typically bought large amounts of dollars from domestic firms eager to trade for yuan, but the slowdown has apparently changed attitudes, traders said. "The trend for firms to sell their dollars as soon as they got hold of them began reversing from the fourth quarter last year," said a trader at a Chinese state-owned bank in Shanghai. "The PBOC no longer needs to buy as many dollars as it did before to help curb the yuan's appreciation. April's forex sales indicated that the central bank has already drastically reduced its intervention in trading." The wild card, of course, is how the United States, which faces presidential election this year, will respond to a pause in yuan appreciation. There has always been a strong diplomatic aspect to the yuan exchange rate, and much of the rises in its value against the dollar have been in reaction - albeit usually delayed - to U.S. pressure. Link this Share this Digg this Email Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com. If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions