miércoles, 7 de enero de 2015

miércoles, enero 07, 2015
Heard on the Street

China’s Yuan Has Hidden Strength

By Alex Frangos

Jan. 1, 2015 12:04 p.m. ET

 
The dollar may be almighty again, but the Chinese yuan isn’t such a slouch, either.

It is easy for casual investors—and politicians attuned to exchange-rate policy—to get caught up in nominal exchange rates against the dollar. By that measure, China’s currency fell nearly 3% in 2014, the first annual drop since it became a more-or-less convertible currency in the 1990s. That sounds significant.
 
Yet in trade-weighted, inflation-adjusted terms—the kind that matter for economies—the yuan rose 5% in the first 11 months of 2014, following an 8% increase the year before, according to the Bank for International Settlements. The dollar rose 6% in 2014 through November.



The yuan’s strength on this basis is a function of two of its three largest trading partners, the European Union and Japan, seeing their currencies weaken substantially. The yuan also gets a boost from China’s trade with emerging markets that have enfeebled currencies, such as Russia and Brazil.
 
For some, such strength at a time when China’s economy is decelerating is all the more reason for Beijing to find a way to let the yuan weaken in earnest in 2015. After all, economists no longer unanimously think the currency is undervalued, and some see it as overvalued. While the current-account surplus likely rose as a percentage of the economy this year, the long-term trend is toward balance.
 
A weaker yuan would help China’s exporters at a time when policy makers are reluctant to push hard with other policy tools. Overzealous interest-rate cuts, or loosening bank reserve requirements, for instance, could worsen the country’s debt-accumulation problems. China has used a strong currency in the past as a way to fight inflation. But with the pace of price increases at a five-year low, that rationale is absent.
 
Just because there are compelling economic reasons for a weaker yuan, however, doesn’t mean a substantial move will happen. Currency management for China is a complex brew of politics, economics and pride.
 
China envisions itself as a bulwark of global stability and its project to internationalize the yuan depends on its reliability. Having a currency that plunges anything close to ruble style isn’t what Beijing wants. A persistently falling yuan also could spur Chinese consumers to sneak even more money out of the country than they do already, long one of Beijing’s biggest fears.
 
Much has been made about China’s intention to let its currency move according to market forces. On the edges, this is happening. In the past month, China set its daily “reference rate” around which the yuan is allowed to trade against the dollar at stronger levels. Yet traders kept pushing the currency weaker, approaching the 2% trading limit. Beijing, which in the past would have intervened in the market, instead got the picture and slightly softened the reference rate.
 
That sort of hands-off approach on intraday moves is noteworthy, and it will continue to be tested.
 
Another few percentage points lower against the dollar—minor moves in currency terms—could even be in the cards. But when push comes to shove, it is unlikely that Beijing will let true currency weakness take hold without a fight.

 
—Alex Frangos

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