Yuan Gain May Be Limited to 1.9% by Year-End as Euro Slump Cools Exports

The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg.

The currency will probably climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said yesterday it will allow greater “flexibility.” The central bank ruled out “large- scale appreciation” and said it will prevent “excessive” moves.

Gains may be limited because the yuan already strengthened 16.5 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition.

“The yuan’s appreciation against the dollar may be limited over the next six months after the Chinese currency gained significantly against the euro,” said Ma Jun, a Hong Kong-based economist for Deutsche Bank AG, who predicts a gain of 1.9 percent. U.S. politicians can only “declare this a partial victory,” he added.

The outlook for appreciation in the survey is stronger than that indicated by forwards. The six-month non-deliverable contract jumped 0.5 percent on June 18 to 6.7596 per dollar, reflecting bets the yuan will rise 1 percent from the spot rate of 6.8262.

Day One

Chinese authorities have prevented the currency from strengthening against the dollar since July 2008 to help exporters cope during the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro.

The yuan may advance 0.2 percent to 6.815 tomorrow and 0.4 percent this week, according to the median estimate of six analysts who gave forecasts. The central bank sets the reference rate for yuan trading at around 9:15 a.m. every day and allows the currency to fluctuate up to 0.5 percent from the fixing.

“The PBOC will probably keep the reference rate stable on Monday,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai, who predicts a 0.1 percent gain this year. “It needs to watch the market’s responses to the flexibility statement. Market participants won’t make bold moves either. They are waiting for more signals from the PBOC.”

The central bank, which has accumulated $2.4 trillion in currency reserves intervening in currency markets, said it will maintain the trading band and curb inflows of short-term speculative capital.

Depreciation Possible

Authorities will “ensure the exchange rate’s fluctuation is controllable and prevent the possibility of market forces causing excessive adjustment in the rate,” the central bank said in a statement today.

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27.

Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview.

Balance of Payments

China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” in the yuan, the central bank said yesterday. The current-account surplus, for trade in goods and services, narrowed 32 percent to $297.1 billion in 2009, government data show.

Exports have been rebounding, exceeding imports by $19.5 billion in May, from a $1.68 billion surplus in April and a deficit of $7.24 billion in March. Overseas sales jumped 48.5 percent in May from a year earlier, customs bureau data show.

Benefits From Gains

The World Bank said last week that a stronger currency would help China cool inflation, which accelerated to a 19-month high of 3.1 percent in May, higher than the government’s full- year target of 3 percent. Yuan gains would also give more room for Asian currencies to strengthen after the euro’s record depreciation prompted exporters from Taiwan to South Korea to call for currency controls to protect their earnings.

Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said in March that they would gain from lower import costs and stronger consumer purchasing power.

“A 3 percent gain against the dollar won’t have any major impact on exports this year,” said Chen Chao, ICBC Credit Suisse Asset Management Co.’s chief economist. “Whether the yuan will rise or fall against the dollar will depend on the dollar’s movement against other currencies.”


14              End of 2010        1st Week          1st Day
Institutions

China Merchants   6.69             6.8               6.815

BoCom             6.62

BNP               6.83

Barclays          6.6

China Citic       6.7

Deutsche          6.7               6.8              6.82

Mizuho            7                 6.78             6.815

Guotai Junan      6.7               6.82             6.826

Industrial        6.82
Bank

StanChart         6.8

Everbright        6.8-6.83
Securities

Citic             6.5-6.63
Securities

RBC               6.5               6.7              6.775

UBS               6.565             6.725            6.8125

Median            6.7               6.8              6.815

--Judy Chen, Belinda Cao, Bob Chen, Frances Yoon, Yanping Li. Editors: Sandy Hendry, Paul Panckhurst

To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net.

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