Chinese executives are reducing support for a stronger yuan as they criticize U.S. monetary easing for weakening the dollar and fueling asset bubbles in emerging-market economies.
Shen Wenrong, chairman of Jiangsu Shagang Group Co., the nation’s biggest private steelmaker, said China should only allow a “token” appreciation while the U.S. is “printing money to stoke inflation.” Ma Weihua, chief executive officer of China Merchants Bank Co., said the yuan shouldn’t climb “too fast” and the Federal Reserve must show more restraint after announcing plans to buy $600 billion of Treasuries. Xia Jingjiang, general manager at Topshow Outdoor Products Co., which makes baseball caps with corporate logos, said the government won’t risk growth with more rapid currency gains.
Calls to limit appreciation from Chinese executives, who in March backed an end to a two-year dollar peg, reflect concern the economy’s expansion may slow as the central bank raises interest rates to cool the fastest inflation since 2008. Yuan forward contracts show traders are betting the currency will stall before Chinese President Hu Jintao’s state visit to Washington next month and climb 2.1 percent in the coming year.
“We hope the yuan will get stronger but don’t want the appreciation pace to be too fast,” Ma at China Merchants, the nation’s sixth-largest lender by market value, said in a Dec. 17 interview in Beijing. “The U.S. isn’t taking responsibility. It called on China to adjust its yuan policy but the whole world is suffering from its easing measures.”
One-month non-deliverable forwards traded at 6.6180 per dollar as of 11:41 a.m. in Hong Kong, signaling little change from the spot rate of 6.6229, according to data compiled by Bloomberg. Twelve-month contracts are stronger at 6.4863. Analysts predict the yuan will appreciate another 5.5 percent to 6.28 by the end of 2011, based on the median of 21 estimates in a Bloomberg survey.
China’s central bank will allow the currency to rise as much as 4.5 percent in the coming year, said Rajeev De Mello, the head of Asian investment in Singapore at Western Asset Management Co. The yuan has climbed 3.1 percent since June 21, when the government ended a policy of fixing the exchange rate at about 6.83 per dollar to protect exporters during the global financial crisis. Thirty U.S. senators called for the yuan to “appreciate meaningfully” before Hu’s trip, in a letter on Dec. 6 to Chinese Vice Premier Wang Qishan.
“The noises from the U.S. probably made the Chinese executives worry China will appreciate the currency at a faster pace,” said De Mello at Western Asset, which oversees $469 billion of funds. “A faster currency appreciation would be too much for the local economy since there has already been a lot of tightening policies in place.”
Shen, from Zhangjiagang-based Jiangsu Shagang, said the government needs to balance maintaining competitiveness of exports and cutting raw-material purchasing costs. Iron ore imports climbed 26 percent last month to the second-highest level of this year, according to government data.
“China shouldn’t pace up appreciation,” said Shen. “As a big buyer of iron ore, it has some benefits. But the benefits are limited.”
Xia at Yangzhou, Jiangsu-based Topshow said his company raised prices of its hats by 3 percent to account for the yuan in the second half.
“The yuan’s appreciation will be gradual,” he said in a Dec. 22 interview. “The central government understands clearly what a strong yuan can do to China’s economy. I hope it won’t take that risk.”
Executives at companies focused on the Chinese market, including Beijing-based computer maker Lenovo Group Ltd., Shanghai-based China Eastern Airlines Corp. and China Merchants Bank, said in March that a stronger currency would lower import costs, boost consumer purchasing power and encourage global trade using the currency.
Dollar purchases to weaken the renminbi have driven China’s currency reserves to $2.65 trillion and flooded the financial system with yuan. The trade surplus exceeded $20 billion for the fifth time in sixth months in November as overseas sales climbed 35 percent from a year earlier, the customs bureaus said Dec. 10.
“Chinese companies have to face the reality of a rising yuan rate as the economy grows fast and foreign-exchange reserves increase,” Zhang Wei, deputy director of China Chamber of International Commerce, a government-run organization representing exporters and importers, told reporters on Dec. 17 in Beijing. “They should also get fully prepared for rising international pressure on China to let the yuan appreciate.”
The People’s Bank of China increased its benchmark one-year deposit rate by 25 basis points, or 0.25 percentage point, on Dec. 25 to 2.75 percent, below November’s inflation rate of 5.1 percent. The spread between the savings rate and its U.S. equivalent reached 197 basis points this week, the most since at least 1996, boosting the allure of holding yuan assets.
The economy grew 9.6 percent in the third quarter from a year earlier, after expanding 10.3 percent in the second quarter and 11.9 percent in the first.
Vice Finance Minister Zhu Guangyao told reporters in Beijing on Nov. 8 the Fed’s asset purchases might “shock” emerging markets by flooding them with capital.
Emerging-market stock funds have taken in a record $92.5 billion and bond funds investing in developing economies had inflows of $52.5 billion this year, EPFR Global, a Cambridge, Massachusetts-based research firm, said last week.
So far, the Fed’s policy hasn’t resulted in a weaker dollar or faster inflation at home.
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has climbed 5 percent since Nov. 3, when the Fed announced the second round of debt purchases under its quantitative-easing plan. U.S. consumer prices will increase at a 1.5 percent annual rate in 2011, compared with a 1.6 percent pace in 2010, according to a Bloomberg survey of economists.
A “stable” appreciation is enough to encourage use of the yuan in global trade and finance, Kong Weipeng, head of fixed-income investment at Haitong International Asset Management, said in a Dec. 22 interview in Hong Kong. The unit of China’s biggest brokerage by assets set up a 5 billion yuan ($754 million) fund in August that invests in offshore renminbi bonds.
“Investors don’t want to see the yuan go up 10 percent one month and then go down 20 percent the next,” he said. “In the short term, if global financial markets become more volatile, either due to the European debt crisis, or emerging markets facing more inflation, then that may slow yuan appreciation.”
Yuan trade settlements jumped 160 percent in the third quarter from the prior three months to 126.5 billion yuan, the central bank reported on Nov. 2.
Sinosteel Corp., the nation’s biggest iron ore trader, favors such transactions because of the potential for local currency gains, President Huang Tianwei said. Ma at China Merchants Bank said that while his bank is gaining from this business, “too fast” of an appreciation would be disruptive.
“The trend for the yuan to rise is doubtless, as China’s economy has grown quickly and it’s impossible for the country to always keep such large foreign-exchange reserves and trade surpluses,” he said. “But if the appreciation is too fast, many Chinese businesses may go bust.”