中國银行-经济月刊(2012第10期)：近期人民幣升值預期轉強的原因及其前景5

http://www.bochk.com 2012 10 2 3 4 In the first half of 2012, the Yuan was weak against the U.S. dollar, and the market expected depreciation of the Chinese currency. However, since late July, market sentiment reversed, with RMB appreciation expectation strengthening. From mid October onward, RMB appreciation picked up pace, and the exchange rate subsequently breached the levels of 6.28, 6.27, 6.26, 6.25, 6.24, and 6.23. What caused the reversal in expectation? What are the prospects of Yuan exchange rates? I. Main reasons of strengthening RMB appreciation expectation When one looks at the charts of RMB exchange rates, the dollar index, and the Euro exchange rates, it becomes clear that the events of strengthening RMB appreciation expectation, dollar weakness, and a Euro rebound all took place in late July. What triggered such major reactions in the foreign exchange market? It all started with ECB president Draghi’s remarks on July 26th that the central bank would do whatever it takes to defend the common currency. As Germany also expressed its support for the ECB’s bond purchase initiatives, the market anticipated an imminent bailout and regained confidence of the survival of the Euro. The Euro then began to rebound. Dollar and Euro exchange rates are in fact two sides of the same coin. While the Euro bottomed, the dollar index declined from the 84 level. The ECB launched its OMT bond buying program on September 6th, and the Fed announced an open-ended QE3 on September 14th. As a result, the Euro rebounded while the dollar depreciated. These developments then caused a widespread appreciation of Asian currencies, with the Bloomberg-JPMorgan Asia Dollar index rising from 114 in July to 118 recently. Since July, the RMB has appreciated by 2.5%, and appreciation expectation has gradually strengthened. Since mid October, the pace of Yuan appreciation has accelerated, and the momentum of appreciation expectation became even stronger. Meanwhile, the Euro rebound stalled, and the dollar rose slightly. Therefore, when it comes to driving RMB appreciation expectation, other factors are in play. According to Citibank’s weekly fund flow report, capital has flowed from developed countries to emerging markets after the launch of QE3. 90% of the funds came from North America, and the Greater China area attracted over 80% of the inflow. Research also shows that hot money mostly flows into RMB-denominated ETF’s, H shares in Hong Kong, and fixed income products such as offshore RMB bonds. Using various channels, some of the hot money detoured via Hong Kong and found their way to RMB assets in the mainland. In other words, QE3 triggered a hot money inflow into Hong Kong and the mainland. These funds chased RMB-denominated assets and drove RMB appreciation expectation. There are four reasons for the hot money inflow to Hong Kong and the mainland. First, in September, China’s exports grew 9.9% from the same period last year, 7.2 percentage points higher than the annual growth rate in August. Moreover, China recorded a trade surplus of $148.3 billion from January to September, considerably greater than the $107 billion registered Economics & Strategic Planning Department http://www.bochk.com Strengthening RMB Appreciation Expectation: Reasons and Prospects ECONOMIC REVIEW(A Monthly Issue) October, 2012 Liu Hong, Economist The viewpoints in the Economic Review do not necessarily represent the opinions of the Bank of China (Hong Kong) Limited. 2 in the same period of the previous year. Second, although China’s third-quarter GDP growth slowed to 7.4%, most economic data for September indicated that the Chinese economy may have bottomed. Third, as the 18th National Congress of the Communist Party of China would take place as scheduled, the market has become increasingly optimistic with China’s economic prospects. Fourth, in the American presidential election debates in October, the Yuan’s exchange rate was one of the focal points, and the treasury department of the U.S. decided to postpone the release of a report on global economy and exchange rate policies. Past experience has shown that the Yuan would usually strengthen prior to the release of the report. According to statistics from SAFE, more companies have opted to hold RMB and sell the dollar. Furthermore, in the mainland, deposit rates for 6 months, 1 year, and 5 years currently stand at 3.05%, 3.25%, and 4.75%, respectively, while wealth management products offer yields as high as 6% to 7%. In contrast, Hong Kong dollar deposit rates for these three durations above are only 0.05%, 0.2%, and 0.3%, respectively, while U.S. dollar interest rates are close to zero. The enormous yield differentials are a powerful attraction for investors holding Hong Kong and U.S. dollars, fueling carry trades. Therefore, Settlement plates have also exacerbated RMB appreciation expectation. II. RMB exchange rates may fluctuate around the current level through yearend It should be noted that the market’s RMB exchange rate expectation is not lopsided. RMB NDF rates are signaling that the Yuan will depreciate considerably from the current level of 6.23 and trade at 6.30 at the end of the year. Due to the following reasons, RMB appreciation expectation may weaken, while the currency itself could fluctuate around the current level in both directions. Chances for significant appreciation are rather slim. 1) The dollar will not depreciate against other major currencies and could instead rebound strongly. The Fed is adopting a weak dollar policy, and QE3 has indeed led to cyclical dollar depreciation expectation. However, the Euro area and the U.K. are also implementing quantitative easing, while Japan recently expanded its QE program by 11 trillion yen to 91 trillion yen. Exchange rates are a relative measure. As major currencies are all in a race to the bottom, the dollar may not have much room to fall. Overseas investors collectively are holding $13.3 trillion of dollar assets, and they are not likely to sit back and watch the dollar depreciate. The dollar has depreciated about 5% since late July. In other words, the impacts of QE3 may have been priced in. Furthermore, compared to other developed economies, the fundamentals of the U.S. are relatively healthy and will provide support for the dollar. America’s current account deficit has narrowed in the past two quarters, while third- quarter GDP grew 2%. In contrast to the American recovery, the Euro-zone’s economy continues to deteriorate. Moreover, the European debt crisis could worsen in the short term, depressing the Euro. Should the Euro weaken, the dollar would experience strong appreciation pressure. As a matter of fact, the dollar index rebounded from 79 to 80.8 in the past two weeks. 2) The RMB exchange rate against the dollar is approaching equilibrium. In order to determine whether a currency is in equilibrium, the key metric is if the current account is balanced. Since the exchange rate mechanism of the Yuan was reformed on July 21, 2005, the currency has appreciated against the dollar by more than 30%. In the meantime, China’s current account surplus as a percentage of GDP has shrunk from a peak of 10% in 2007 to less than 3% in 2011. In the first three quarters of 2012, China’s current account surplus amounted to $147.8 billion, or 2.6% of its GDP. This number is 0.3 percentage points smaller than that in the same period last year and within the reasonable range recognized by international standards. Even calculations using American standards suggest that the Yuan is not significant undervalued. If the dollar should rebound, the Yuan would find it difficult to considerably appreciate against the dollar. 3) China’s export sector and economic restructuring are still faced with challenges, which would restrain appreciation pressure. Although China’s international trade data for September and October improved, the magnitude of improvement was probably exaggerated due to hot money inflow via the trade channel as well as misreporting by exporters in pursuit of export tax rebates. The Canton Fair, widely regarded as a bellwether of China’s international trade, might be a more reliable indicator. During the fair, the number of foreign buyers decreased by 10.26% from the same period last year, while the value of export deals amounted to $32.68 billion, or 9.3% below the level of the previous fair. Exports deals with the EU, U.S., and Japan struck in the fair declined by 10.5%, 9.4%, and 36.6%, respectively. Moreover, short to medium-term orders for the next 6 months account for 86.6% of the deals, which implies considerable difficulties to SME’s. These numbers painted a picture of insufficient export orders and weak economic recovery. As a result, it has become a tall order to achieve the 10% growth target for international trade. The current manufacturing structure in the Pearl River Delta and the Yangtze River Delta suggests that economic restructuring is a long-term task. An appreciating currency may not be able to help promote restructuring but could force a large number of SME’s to go out of business. To foster economic growth and restructuring, the Yuan should not appreciate significantly. Recently, the reference rate of the RMB has been around 6.30, which indicates that the Yuan will not rise dramatically. This new development is likely to temper RMB appreciation expectation. 4) Hot money inflow to RMB assets may slow. In recent years, when the European and American economies stabilized, funds flew into emerging markets. When the European and the U.S. economies deteriorated, funds flew back into Europe and America. In the last two months, the European debt crisis stabilized, and the U.S. continued to recover tepidly. As a result, funds have been flowing into emerging markets. Nevertheless, RMB appreciation pressure from the U.S. would weaken now that the presidential election is over. In China, effects of the 18th National Congress may wane, and it will take a while to improve the prospects of the export sector. In Europe, the fiscal condition of Greece is still worsening, and the European debt crisis is far from over. Should the crisis escalate, hot money would flow back to Europe and the U.S. The RMB is considered a risk asset, thus funds would migrate from RMB assets to dollar assets should global financial risks increase. Therefore, even though hot money inflow into RMB assets may last for a while, the momentum will probably fade. III. In the future, the RMB still has room to appreciate In the next few years, the dollar may strengthen slowly. However, the trend of stable and comparatively rapid economic growth in China will generate appreciation pressure for the Yuan, which could rise by 1% to 2% per year. 1) The mainland economy can maintain growth rates between 7% and 8% in the next few years. The twelfth five-year plan has targeted an average growth rate of 7% for the next five years. Past experience suggests that actual GDP growth would surpass government targets. There are two major supportive factors. For one, a reform dividend will replace a demographic dividend. The goal of reform is to shift China’s economic growth engine from investment to consumption, with private capital assuming a more important role in industrial restructuring. The other factor is urbanization as a new economic growth engine. At a rate of 51.3%, China’s urbanization is in an acceleration phase, providing momentum for economic growth. Therefore, the mainland economy is likely to grow by 7% to 8% in the next few years, slower than the 10% average growth rate in the past 30 years but significantly stronger than the 0%- 3 3% growth in the developed world. RMB appreciation pressure could come from two fronts. For one, purchasing power parity suggests that the currency of a more productive economy will appreciate. For another, Chinese wages, despite growing over 20% in the past few years, still lag behind the levels in developed markets. In the long run, such wage differential will result in appreciation pressure for the Yuan. 2) The RMB exchange rate regime will be further reformed. For the time being, China’s exchange rate mechanism resembles a managed float that takes into consideration a basket of currencies as well as market supply and demand. In order for exchange rates to be determined by the market, floating ranges may be expanded, and other regulations could be relaxed. Such measures could produce RMB appreciation pressure for two reasons. The first has to do with the composition and weighting of the currency basket. According to market consensus, the Euro and the dollar would be heavily weighted, while other currencies should be trade-weighted. Within the basket, the Euro and the dollar usually move in opposite directions and mostly offset each other. Meanwhile, non-dollar currencies, especially those of emerging countries, would likely assume higher weighting. With strengthening appreciation expectation for emerging markets’ currencies due to their stronger growth rates, the RMB will be under pressure to appreciate. Second, the market would be afforded more freedom to discover equilibrium exchange rates and, in doing so, could consider historical data for reference. Before the change in exchange rate regime in 1994, the RMB had enjoyed a much stronger exchange rate. For instance, in 1979, it took only 1.555 RMB to exchange for 1 dollar. If history is any guide, RMB appreciation expectation will strengthen. 3) The internationalization of the RMB will proceed steadily. International currencies such as the dollar, Euro and Yen are all undergoing quantitative easing programs that lack proper restraint. This situation may continue until 2015. To mitigate exchange rate risks and avoid a dollar trap’’, the PBOC will definitely promote steady RMB internationalization. When the Yen, the Deutsche Mark, and the Euro became increasingly internationalized, their values also appreciated. As a currency gains trust, it becomes widely used in commodity pricing, trade settlement, foreign exchange, and as a store of value. As a result, demand for the currency will rise significantly, generating appreciating pressure. Therefore, as RMB internationalization accelerates, the currency will experience appreciation pressure. 4) As the imbalance in Sino-American trade persists, the U.S. will have an excuse to press for RMB appreciation. From January to September of 2012, China amassed a trade surplus of $140.9 billion with the U.S. Since 2001, China’s cumulative trade surplus with the U.S. has reached $1,460 billion. Due to different division of labor in China and the U.S., there exists very little competition between Chinese and American manufacturing and little substitutability among goods produced by the two countries. Most of China’s exports to the U.S. consist of products the U.S. does not produce any more. Meanwhile, the U.S. has insisted on placing restrictions on technology exports to China. Should such structural problem remain unresolved, the imbalance in Sino-American trade would persist. According to Roland Holst, until 2020, China will continue to enjoy a trade surplus with America. As trade frictions persist, the U.S. would have excuses to press for RMB appreciation. In summary, from now through the end of the year, RMB appreciation expectation might wane. The Yuan will fluctuate around the current level, and chances of significant appreciation are slim. In the next few years, even as the dollar may strengthen, the Yuan will still appreciate slowly as China’s economy continue to grow at a rate of between 7% and 8%. As a result, the RMB may appreciate between 1% and 2% per year. 4 . GDP 2010 2011 2012/Q1 2012/Q2 ( ) GDP ($100 Million) 17,376 18,250 4,437 4,416 (%) Change (%) 7.1 5 0.7 1.1 . External Trade 2010 2011 2012/9 2012/1-9 ( ) Total trade ($100 Million) Domestic exports 695 657 54 439 Re-exports 29,615 32,716 3,078 24,757 Total exports 30,310 33,373 3,132 25,196 Total Imports 33,648 37,646 3,583 28,625 Trade balance 3,338 4,273 452 3,429 (%) YOY Growth (%) Domestic exports 20.4 5.5 10.2 -13.1 Re-exports 22.8 10.5 15.3 1.8 Total exports 22.8 10.1 15.2 1.5 Imports 25 11.9 14.9 2.5 . Consumer Price (%) Change in Composite CPI (%) 0.5 5.3 3.8 4.2 . Sale & Purchase of Building Units ( ) No. of agreements 162,739 108,814 9,990 82,895 (%) Change (%) 21.5 33.1 51.9 9.5 . Employment 2010 2011 2012/6-8 2012/7-9 ( ) Unemployed (ten thousands) 15.9 12.85 13.2 13.3 (%) Unemployment rate (%) 4.3 3.4 3.2 3.3 (%) Underemployment rate (%) 2 1.7 1.7 1.6 . Retail Market 2010 2011 2012/9 2012/1-9 (%) Change in value of total sales (%) 18.3 24.8 9.4 10.6 (%) Change in volume of total sales (%) 15.5 18.4 8.5 7.4 . Visitors ( ) arrivals (ten thousands) 3,603 4,192 379 3,537 (%) Change (%) 21.8 16.4 18.8 16.3 . Financial Market 2010 2011 2012/8 2012/9 (US$100 = HK$) 777.45 776.92 775.55 775.35 H.K. Dollar Exchange Rate (US$100 = HK$) (%) change in Money Supply (%) M1 12.8 10.8 13.3 15.7 M2 8.1 12.9 8.8 10.5 M3 8 13 8.7 10.4 (%) Change in deposits (%) Total deposits 7.5 10.6 6.8 8.4 In HK$ 7.2 3.4 8 10.5 In foreign currency 7.9 18.7 5.6 6.4 (%) Change in loans & advances (%) Total loans & advances 28.6 20.2 7.4 7.7 use in HK 24 12.1 3.4 4.1 use outside HK 48.3 49.6 19.3 18.1 Trade financing 56.5 26.9 16.1 16 (%) Best lending rate (%) 5.0000 5.0000 5.0000 5.0000 Hang Seng index 23,035 18,434 19,483 20,840 (Key Economic Indicators)