RMB currency trend

[Tony_onrock]

In its quarterly monetary policy report today, the PBOC removed the usual reference to "maintaining basic stability of the exchange rate". The new statement on exchange rate policy now reads: "to improve the exchange rate formation mechanism by taking into account international capital flows and major currencies' movements." We view this as an early signal that the government is preparing for the resumption of the appreciation of the RMB, which has been a de facto peg to the USD since mid-2008.

 

By noting "major currencies' movements", it means that the government has realized that the RMB has depreciated significantly over the past seven months against other currencies (by 7% on a REER basis, and 10-30% against some major currencies). So far, G3 have been complaining about the RMB depreciation, and in the coming months we think emerging market economies such as Korea, India, Brazil and Mexico will also likely express their concerns on the RMB policy. China, with a strong desire to become a "responsible large nation", will likely react positively to these pressures especially from EM countries.

 

The reference to "international capital flows" by the PBOC points to another interesting consideration. That is, the government remains concerned that if China's interest rates are rising and the RMB also appreciates, it would attract capital flows that will increase the PBOC's sterilization costs and/or increase the risks of domestic asset bubbles. Therefore, China will likely put pressures on the US for earlier Fed rate hikes, which will make China's job easier (i.e., China's rate hike and RMB appreciation would attract less capita inflows compared with the scenario in which the Fed holds its low rates for too long). Also, we believe that the Chinese government will likely resume (or toughen the implementation of) some administrative measures in dealing with hot money inflows.

 

A few months ago, our prediction was that the RMB would resume its gradual appreciation from Q2 next year. Given that export recovery is stronger and front-loaded, and global political pressures are intensifying, we now believe that the RMB will likely begin its appreciation from Q1 next year (most likely second half of Q1). We think the annualised rate of RMB appreciation could be as fast as 4-7% in Q2 when export growth peaks at 15-20% yoy, but the pace of appreciation may slow to an annualised 2-4% by the end of the next year when export growth decelerates again on the "second dip" of US economic growth.

 

At the sector level, the impact of RMB appreciation is positive for airlines, steel, and paper, but is negative for oil, non-ferrous, electronics, and garment industries.

[Tony_onrock]

China just released the October economic data. Overall, the data set should be viewed as neutral, but the more interesting part is structural: it shows weaker-than-expected loan and FAI growth, and stronger-than-expected retail sales (consumption) growth. This is broadly consistent with our view that investor attention should gradually shift away from FAI-driven sectors towards consumption.

 

October's new lending came in at RMB253bn, significantly below the market consensus of RMB350bn and last month's RMB516bn. We knew that lending by big banks was slow, but it is surprising that smaller banks are also reporting lower figures. It reflects the impact of tightening capital requirement and/or weaker-than-expected loan demand from the corporate sector. Ytd urban FAI growth slowed to 33.1% yoy (from 33.3% in Jan-Sep), same as our prediction but lower than consensus of 33.5%. This implies that monthly FAI growth fell to 31% yoy in October, down from the 35% in September and the recent peak of 39% in May. The RMB amount of new project starts also posted slower growth of 66% yoy in October, down from the average of 80% yoy in the past four months. Overall, these data points are slightly negative for banks, construction materials, construction services, and construction machinery.

 

Retail sales growth is the brighter spot. Its October reading accelerated further to 16.1% yoy from 15.5% in September, and exceeded market expectation of 15.7%. Earlier last month, the Ministry of Commerce reported that daily retail sales were up 18% yoy during the National Day Holidays. We think it partly reflects improved consumer confidence as labor markets are tightening especially in export-related sectors. At the product level, the retail items that saw acceleration in growth include foods, electronic appliances, and cosmetics.

 

Export growth is in line with consensus. Exports fell 13.8% yoy in Oct, improving from the 15% yoy drop in Sept. We expect another 15-20ppt increase in yoy export growth in the next two months, on strong sequential recovery (driven by a front-loaded US recovery) as well as an extremely favorable base effect. Imports fell by a larger-than-expected 6.4% yoy in October, resulting in a larger trade surplus of USD24bn. The rise in trade surplus, together with a sharp recovery of exports and growing international political pressure, will lead to a resumption of RMB appreciation from Q2 next year, in our view.

 

IP growth accelerated to 16.1% yoy in Oct, up from 13.9% in September, but the improvement is mainly explained by the base effect.

 

Inflation --both CPI and PPI -- continues to show an narrowing of yoy decline, although the pace of improvement is slightly slower than consensus expectations. CPI fell 0.5% yoy in Oct, 0.3ppt less than in Sept. PPI fell 5.8% yoy, up 1.2ppts from Sept. On a mom basis, the major increases in CPI are seen in apparel (up 0.8%), and housing (up 0.4%). Going forward, we think Nov CPI inflation will turn positive and December CPI will likely be in the range of 0.5-1% yoy. In October, food prices declined partly on seasonal factors. But in the coming months, the continued increase in housing prices, oil price adjustments (e.g., the administered oil prices were lifted by 8% just a few days ago), and worsening weather conditions in coming weeks will pose upward pressures on inflation.

 

On policy implications, the slowdown in October lending and FAI growth may slightly ease the urgency for monetary policy tightening in the near-term, but the broad roadmap for the government's exit from expansionary policies should remain intact.

[Tony_onrock]

Read a few more reports on PRC economy, checking the reported figure and the cement and steel production figures. The conclusion is that based on the cement and steel production figures, the GDP and investment figures for Q1 09 were inflated and the peak of investment may peek in Q1 10, with inflation likely to follow at or around that time. Currency appreciation, despite all the resistence, will happen over the course of next year when export numbers pick up and more and more liquidity pour into the Chinese assets, putting more pressure on the Yuan to appreciate. The second part is just my own view. Just bought an Town house (300 sm) in Nanning on the river there to hedge the currency and inflation risk.

[Mike and Yan]

ummmmm

 

OK

 

BUT......

 

does that mean the conversion rate $$ to RMB will begin to drift down?

 

(1 dollar buys... say...5 RMB)

 

[b.c]

ummmmm

 

OK

 

BUT......

 

does that mean the conversion rate $$ to RMB will begin to drift down?

 

(1 dollar buys... say...5 RMB)

 

 

Its anybody's guess at this point. My guess is that we will see six within the next year.

[fineart]

ummmmm

 

OK

 

BUT......

 

does that mean the conversion rate $$ to RMB will begin to drift down?

 

(1 dollar buys... say...5 RMB)

 

 

Its anybody's guess at this point. My guess is that we will see six within the next year.

I agree with you, BCCO, though I wished the era 10:1 for USA to RMB came again. Then will suddenly make all of us CFLers richer.

 

By the way, you guys have good taster. I like your bedding color.

[knloregon]

My hunch is that the RMB will not change vry much against the $ for the next several years.

 

China will need its monetary advantage to kick up exports to our much slower economy, and the huge $ surplus (T-notes) in China (purchased with weaker RMB ---ie more of them---maintains its full value only if its relative value to the RMB remains about the same.

 

I would guess that China will slowly try to rid itself of Treasuries---perhaps finance its own healthcare program with some of it---it can't move quickly, because then the dollar value plummets, and thats why China remains pissed at the US---the flame-out Wall Street caused will linger on in our economy, and China is attached to our hip.

 

(Saturday Night Live skit---which I didn't see, but heard on talk radio---hilarious )

[Tony_onrock]

Can't find the old post when we started the debate where RMB will go when it was 8.28. It would be interesting to dig up that old post.

[Tony_onrock]

In the last two days, several government agencies issued a number of new policies/rules related to FX conversion, travel, and SOE financial management.

 

1) SAFE rule to limit hot money inflows

 

The State Administration of Foreign Exchange (SAFE) issued a notice this afternoon in an obvious attempt to limit hot money inflows by tightening the restrictions on FX conversion by individuals. Currently, any Chinese citizen is allowed to convert up to USD50,000 to RMB per year. However, many people (mainly overseas Chinese) have used multiple names (some time as many as 10 or 20 of friends and relatives) to convert large amounts of foreign exchange into RMB for the purpose for purchasing properties and stocks in China. Today's SAFE rule prohibits any overseas individual or institution from transferring FX to more than five different individuals in China for FX conversion purposes. This policy will make it less convenient for overseas investors to use the above-mentioned channel to invest in China.

 

This is one of the initial steps that the government uses to limit hot money inflows. Other options, some of which were used before, include identifying and penalizing fake FDIs, over-invoicing of exports and under-invoicing of imports, the black market, and underground exchange bureaus. At some point, especially when property bubbles become evident, the government will probably tighten the restrictions on property purchases by foreigners (the implementation of which was relaxed in many localities over the past one and half years).

 

We do not think today's mini step by SAFE will have an material impact on the market, but it does signal the government's intention to take further actions as asset bubbles develop further. If the restrictions on foreigners' purchase of properties in China are re-imposed, it would be a significant negative to sentiment on property stocks.

[Tony_onrock]

Because certain restrictions, I will not post the source of the various reports here any more. Should any one be interested in the full report or want to verify the source, I will provide them via private email.