Renminbi revaluation just 'first small step'

By Dave Shetlock

 
Currencies were the focus for financial markets this week as investors digested news that China was revaluing the renminbi and the latest words of wisdom from Alan Greenspan, the Federal Reserve chairman.

By contrast, equities were little moved over the week with markets for the most part brushing aside another series of terrorist incidents in London. China announced it was revaluing the renminbi by 2.1% against the dollar and said it would replace its peg to the US unit with a basket of currencies. The move was given a mixed response by analysts.

"We view this as a positive event for the global economy and for equity markets and one that reinforces our bullish cyclical calls across the region on the back of improving global industrial activity," said Goldman Sachs. But Steve Barrow, currency economist at Bear Stearns, said the move was very much in line with expectations.

"In this regard, it is not a big deal," he said. "It is more like the first small step on the long path to significant renminbi appreciation."

"The main conclusion as far as we are concerned is that, if the US wants this change to result in a lower dollar/renminbi, it will have to accept, or even encourage, a weaker dollar against other major currencies such as the euro and yen."

 
The greenback duly tumbled against the yen before staging a modest recovery yesterday. The yen made strong gains against sterling and the euro. Analysts said the yen would benefit from expectations that a strong renminbi would prompt other Asian countries to allow their currencies to appreciate, boosting Japanese competitiveness.
US Treasury bonds also suffered a sharp sell-off following the news from Beijing, with analysts suggesting the revaluation could weigh on Chinese purchases of US bonds.

The yield on the 10-year Treasury bond drifted back yesterday but was still up sharply from levels seen at the start of the week. Bond yields were also pushed up by the other big market event of the week -Mr Greenspan's midweek testimony on monetary policy to Congress.
He gave an upbeat assessment of the US economy and confirmed that, as expected, interest rates would continue to be raised to keep inflation at bay. The question of how high the US central bank raises borrowing costs is one of the uncertainties facing the market, particularly with increasingly robust US house prices fuelling consumer spending.

Ian Harwood, global head of economics and strategy at Dresdner Kleinwort Wasserstein, believes it is very unlikely that rates will be raised specifically to deflate home prices.  "The Fed didn't act thus vis-a-vis the late 1990s equity bubble and, crucially, subsequently argued it was right to behave as it did," he said.
"Fed officials, moreover, continue to deny the existence of a housing bubble, though, interestingly, they are now talking in terms of 'froth'."
World equity markets put in mixed performances. Wall Street was little changed over the week as the quarterly US reporting season got into full swing. By midday yesterday, the Dow Jones Industrial Average was down 0.3% while the S&P 500 was up slightly.
The Nasdaq Composite index inched up 0.6%  following positive earnings news from the technology bellwether IBM.

European stocks touched a three-year high on Tuesday but subsequently retreated to end the week virtually unchanged. In Asia, Tokyo's Nikkei 225 Average slipped 0.5% . Car stocks fell back sharply yesterday following the renminbi's revaluation.
Elsewhere in the region Australian and Indonesian shares hit record highs, while Singapore was boosted by a loosening of restrictions on property lending.
Oil prices fell steadily through the week before staging a modest rebound yesterday.
Another large build in US distillate inventories plus a weakening of Hurricane Emily were behind the drop in crude prices.

China cools hopes of rising renminbi

By Mure Dickie in Beijing

China kept its newly unpegged and revalued currency on a tight rein yesterday, the renminbi ending the day slightly lower against the dollar. The decline appeared intended by Beijing to cool hopes that the policy change would open the way to the kind of significant appreciation demanded by Washington. US critics say the renminbi is undervalued by 20% and gives China an unfair trade advantage.
In its first day of trade after Thursday's 2.1% revaluation against the dol lar, the renminbi slipped to 8.1111 from its opening of 8.1100.

 Although the new mechanism allows the renmimbi to rise or fall up to 0.3% against the dollar each trading day, China's domestic currency market is dominated by the People's Bank of China, the central bank, with other traders playing a relatively minor role.
However, international investors yesterday still expected further rises: in Singapore, one-year renminbi non-deliverable forwards rose to around 7.64 per dollar, a level that predicts further revaluation of over 6% by the middle of next year. Chinese stocks rose and shares of Asian exporters fell by magnitudes that also suggested expectations of a further renminbi appreciation.

 
Merrill Lynch, the US investment bank, forecast that the renminbi would rise to 7.5 to the dollar by the end of this year, while Bank of America saw the renminbi being held at 8.11 to the dollar until the year-end. BNP Paribas believed Beijing would allow the renminbi to firm to 7.9 by December.

Separately, in early trading in London yesterday, eurozone government bond prices surged to a five-year high relative to US Treasury prices, as some investors concluded that Asian central banks would buy fewer US government bonds in future.

 
Within China, expectations of future currency moves were seen as likely to fuel a renewed inflow of speculative funds by companies and individuals who can find ways around the country's capital controls.
However, Xia Bin, director general of the Financial Research Institute under the State Council, China's cabinet, warned speculators against harbouring "illusions" about further revaluation, saying no "clear" appreciation was likely in the remainder of this year.
Asian currencies, with the notable exception of the Indian rupee and the Japanese yen, recorded widespread gains yesterday on the back of the revaluation of the renminbi.

 
The currencies of South Korea, Taiwan and Singapore were among the bigger beneficiaries of capital inflows as investors focused on their trade links with China. However, the rises prompted market talk that central banks were intervening to cap any gains. With exports accounting for a large part of the economic growth of many Asian countries, monetary authorities are expected to counter any large rises in their currencies.

 
South Korea's finance minister Han Duck Soo was quoted as saying that the authorities would "take preemptive and strong steps when there is instability in the financial market".
Talk of central bank intervention was behind the slide in the Indian rupee - the biggest daily fall among the world's currencies - after it recorded the biggest rise in seven months on Thursday amid hopes Indian exporters would gain an edge over their Chinese rivals.

The yen also reversed part of yesterday's gains as investors focused on the threat of intervention. In Japan, a chorus of positive comments from politicians about China's measured revaluation
failed to quell investors' fears that a stronger yen and a weaker dollar would undermine the country's exporters and the Nikkei 225 benchmark dropped 0.76%  as a result.

 
But having strengthened sharply after the announcement, the yen weakened during the course of the day as analysts and investors concluded the revaluation brought many benefits to Japanese companies.
The Malaysian ringgit, pegged at M$3.8 to the US dollar until Thursday, when the government announced a managed float in tandem with China's revaluation, rose a modest 0.7%  yesterday to close at 3.7750-3.7800 to the US dollar.

The Taiwan dollar closed up 0.95%  at 31.648 to the US dollar. "That is the
pattern the central bank wants to see," said a Japanese bank currency trader in Taipei.
Analysts expected the revaluation of the renminbi to trigger another wave of speculative fund flows into Hong Kong, whose currency is considered a proxy for the Chinese currency.

Peter Mandelson, the European Union trade commissioner, yesterday said he did not expect the revaluation to have an immediate impact on trade flows, but welcomed it as a step in the right direction.

Additional reporting by Justine Lau in Hong Kong, Kath-rin Hille in Taipei, Gillian Tett and Steve Johnson in London and Tobias Buck in Brussels

Revaluation an "  initial adjustment"   says central bank chief

By Geoff Dyer in Shanghai

The head of China's central bank said the modest revaluation of the renminbi announced last week was only an "initial" step, fuelling speculation that the authorities will strengthen the currency further over coming months. In his first public comments since Beijing announced its long-expected shift in foreign exchange policy, Zhou Xiaochuan, governor of the People's Bank of China, said: "We have made an initial adjustment of 2% ''

 
His comments are likely to be welcomed in Washington, where the Bush administration had been pushing for a larger appreciation of the renminbi. However, Mr Zhou said the shift was unlikely to have much impact on the US trade deficit. "China's exchange rate reform will not have too much influence on US deficits," he said.

Under the new policy, announced on Thursday evening, China raised the level the renminbi trades against the US dollar by 2.1% to Rmb8.ll, and said the currency would now fluctuate against a basket of currencies. While the policy does not imply a big immediate change, it does leave the authorities with considerable discretion to let the currency appreciate further.

Mr Zhou, considered to have pushed for a change over the past year, gave no indication of the timing of a further appreciation or widening of r the trading band. "The Asian financial crisis has taught us many lessons. Exchange rate reform needs a healthy financial market and healthy financial institutions," he told Chinese state television over the weekend.

Stephen Green, economist at Standard Chartered in Shanghai, said: "Our view is that they will probably sit tight for the next three or four months. They will have a honeymoon period to examine lots of other factors, such as the behaviour of Asian currencies and the US dollar."

By signalling the possibility of further strengthening of the renminbi, the Chinese authorities might hope to limit the political pressure they have been facing on the currency and stifle calls for greater protectionism in the US and Europe. The risk is that investors will see the Chinese currency as a one-way bet and pour speculative funds into the country, which could cause inflationary pressures and create asset price bubbles, especially in the property market.

 
China has seen a substantial inflow of foreign capital, not just in the form of direct foreign investment. China's foreign exchange reserves reached $711bn (£409bn, €589bn) in June, a 51%  increase on the year before, which economists said was partly the result of short-term capital inflows. However, it has strict capital controls which can help limit the impact of speculative investment.

Michael Pettis, a professor at Beijing University, said there would be a large inflow of capital, but not because of last week's revaluation, which had done little to change the expectations of investors.
"By the time it happened there were very few people who did not think that it was going to take place," he said. "If there had been more of a surprise, then some people might see it as a sign that the central bank can be forced into changing course."

Mr Green said although the currency was only likely to move in one direction, the potential gains to speculators might be negligible. "The government has shown that any changes are going to be small and gradual."

In der andauernden Währungsdiskussion über den unterbewerteten Yuan geht China nun in die Offensive. Führende Industrienationen, vor allem die USA, hatten seit längerem eine Aufwertung der chinesischen Währung verlangt, um die globalen Ungleichgewichte zu reduzieren.

China kontert jetzt, die US-Wirtschaftspolitik trage hieran selbst Schuld und leiste zugleich einen nennenswerten Beitrag zur Überhitzung der chinesischen Wirtschaft. Die USA überfluteten die globalen Märkte mit Cash, der auch in den chinesischen Markt fließe, die Zinsen niedrig halte und das dortige Wachstum übermäßig begünstigte.

Die Vorwürfe Chinas könnten ein Versuch sein, den globalen Fokus vom Yuan auf die Geldpolitik der USA zu richten, obwohl die Federal Reserve die Leitzinsen in den vergangenen beiden Jahren um mehr als vier Prozentpunkte erhöht hat. Einige Analysten halten die Argumente der Chinesen jedoch für gerechtfertigt. Richtig oder nicht, Chinas Einwände dürften auf den verschiedenen multilateralen Treffen im kommenden Monat diskutiert werden. Im September finden im asiatischen Raum die Konferenz der Finanzminister der APEC, der G-7-Gipfel und die Jahrestagung des Internationalen Währungsfonds statt.

Die USA und andere Industrieländer dürften China bei diesen Veranstaltungen auffordern, eine stärkere Aufwertung des Yuan zuzulassen, um einen Beitrag zur weltwirtschaftlichen Stabilität zu leisten. Der unterbewertete Yuan gebe China einen unfairen Handelsvorteil, lautet der allgemeine Vorwurf. Einige Beobachter sehen diese Unterbewertung bei bis zu 60 Prozent. China dürfte im Gegenzug auf die bereits in diesem Jahr ergriffenen Maßnahmen verweisen, so die Straffung der geldpolitischen Rahmenbedingungen und verschiedene Schritte zur Liberalisierung des Kapitalverkehrs. Damit will China einerseits die eigene Wirtschaftsdynamik dämpfen und andererseits den internationalen Forderungen entgegenkommen.
Überliquidität des Dollar.

Am deutlichsten formulierte jüngst der Bankenregulierer Yu Xuejun die Vorwürfe gegen die USA. Ursache für die Überhitzung der chinesischen Wirtschaft sei die „Überliquidität" des Dollar, sagte Yu. Die „lockere Geldpolitik" der USA von Anfang 2001 bis Mitte 2004 habe zu global überhöhten Vermögenspreisen geführt und die starken Kapitalströme in die chinesischen Wirtschaft verursacht. Diese Entwicklung habe zugleich zur Aufblähung der chinesischen Währungsreserven beigetragen - das Land hält mittlerweile weltweit den größten Bestand an Reserven. Yu gehört zwar nicht zu den wirtschaftspolitischen Entscheidungsträgern, seine Meinung könnte jedoch Chinas neue Taktik in der Währungsdebatte widerspiegeln.

 
China hatte erst im Juli 2005 die heimische Währung von der Dollar-Bindung gelöst und damit die Märkte überrascht. Dabei wurde der Yuan gegenüber dem Dollar um 2,1 Prozent aufgewertet und an einen Währungskorb gebunden. Seither hat der Yuan trotz des hohen Handelsüberschusses von 134 Milliarden Dollar im Jahr 2006 um lediglich 2 Prozent zugelegt, da China durch Interventionen eine stärkere Aufwertung unterbindet. In den letzten Monaten hat sich der Überschuss von Rekord zu Rekord bewegt und dürfte bis Jahresende sogar 150 Milliarden Dollar betragen.