lunes, 30 de marzo de 2015

lunes, marzo 30, 2015
Heard on the Street

The Yuan Strikes Back

By Alex Frangos

March 26, 2015 7:45 a.m. ET

China has made steps toward letting the market determine the exchange rate, but the country continues to keep a firm grip on it.  China has made steps toward letting the market determine the exchange rate, but the country continues to keep a firm grip on it. Photo: Bloomberg News


Someday the Chinese currency might buckle under the weight of a slowing economy. Beijing will make sure this isn’t the year for that to happen.

The Chinese yuan has strengthened mightily in the past couple of weeks, and is now just about where it started the year versus the dollar. That is despite a darkening growth outlook and expectations for increasingly loose monetary policy, factors that normally should exert downward pressure on a currency.

But China is different. While the government has made steps toward letting the market determine the exchange rate, it remains tightly controlled.

This year, it might make economic sense to let the currency slide to give growth a boost, similar to how a weaker currency is benefiting the eurozone and Japan. Some investors are even betting on a major devaluation. A weaker currency would provide relief to exporters after the yuan has strengthened 15% on real, trade-weighted terms over the past two years.

But such a move is unlikely. China prizes stability in most things, and that extends to its currency, too. A fall of a few percentage points against the dollar, as happened last year, or maybe a smidgen more, seems around what Beijing is willing to tolerate.



There is also a wild card this year. The composition of the International Monetary Fund’s quasi-currency known as the special drawing right, or SDR, is up for review starting in May, and China wants in.

China’s Central Bank Gov. Zhou Xiaochuan and other officials have been beating the drum this week about the yuan’s inclusion in the SDR, which serves as an accounting currency and means to move around capital among IMF members. Getting in would be a milestone in China’s effort to position its currency as an eventual rival to the dollar in international finance.

There is nothing to preclude a currency that goes down from joining the small group that is included in the SDR, namely the dollar, euro, yen and pound. But China would hardly want this to be the year when the yuan causes financial-market stress. A devaluation would also risk reigniting the politically-charged exchange-rate debate with the U.S., which holds sway in IMF matters.

The terms of inclusion state that an SDR currency must be “freely usable.” That doesn’t mean China has to fully liberalize its capital account, or even stop intervening in the level of its currency. Mr. Zhou pointed to the Shanghai-Hong Kong Stock Connect program as a sign of progress since 2010, when the IMF rejected the yuan’s inclusion. To convince the IMF, Mr. Zhou will need to deliver more changes, something he has promised.

In the long term, gaining SDR inclusion could strengthen the yuan, as it would become a more viable currency for governments and central banks to hold. Of course, opening more to capital flows would also mean the currency could weaken when the economy slows.

But for now, with China continuing to set a daily exchange rate and intervening in foreign-exchange markets to keep it near that rate, any falls will be guided by Beijing’s hand.

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