Exclusive: China central bank official says yuan at right level, disorderly capital flows unlikely

© Reuters. FILE PHOTO: Man sits in front of the headquarters of the People's Bank of China, the central bank, in Beijing © Reuters. FILE PHOTO: Man sits in front of the headquarters of the People’s Bank of China, the central bank, in Beijing

By Kevin Yao and Ryan Woo

BEIJING (Reuters) – China’s yuan is at an appropriate level currently and two-way fluctuations in the currency will not necessarily cause disorderly capital flows, a senior official at the People’s Bank of China told Reuters on Tuesday.

The yuan has weakened nearly 2.4% since U.S. President Donald Trump threatened early this month to impose more tariffs on Chinese goods from Sept. 1, though there are signs China is trying to stem the declines.

“The current level of exchange rate is appropriately aligned with fundamentals of China’s economy and market supply and demand,” Zhu Jun, head of the central bank’s international department, said in an interview with Reuters.

Zhu said China was “shocked” by the U.S. Treasury Department’s move last week to label China a currency manipulator, hours after Beijing let the yuan slide past the key 7-per dollar level to its lowest level since the global crisis.

But Zhu asserted that China will be able to “navigate all scenarios” arising from the Trump administration’s decision to label it a currency manipulator for the first time since 1994, which rattled global markets.

China is unlikely to face serious consequences from getting that label given the apparent lack of Group of Seven and International Monetary Fund support for Washington’s move, former and current U.S. and G7 officials said.

But some Chinese advisers and former officials have sounded alarm bells over a possible wider conflict between China and the United States. The year-long trade war between the world’s two largest economies has already spread beyond tit-for-tat tariffs on goods to other areas such as technology and currency.

UPGRADING THE TRADE WAR?

The real aim of the U.S. currency manipulator label is to disrupt China’s financial markets and its economy, said Chen , former chairman of the China Development Bank – the country’s biggest policy bank.

“The U.S. step to list China as a currency manipulating country is an important action to upgrade the trade war into a financial war,” Chen, who remains an influential figure on economic issues, told a forum over the weekend.

Zhu of the central bank told Reuters that in the short run, external shocks will play a role by influencing the yuan’s movements.

“That said, as long as RMB moves in an orderly manner based on market supply and demand, such movements in either direction do not necessarily mean disorderly movement of capital flow,” she said. The yuan is also known as renminbi, or RMB.

Zhu reiterated that recent yuan volatility was a normal market reaction to escalating trade tensions, adding “If it’s preventing such responses that would constitute real manipulation.”

Analysts say a weaker yuan could help China’s ailing exporters to cope with higher U.S. tariffs amid an escalating trade war, but any sharp yuan drops could fuel capital outflows as the world’s second-largest economy faces increased headwinds.

REPEATED PLEDGES

Chinese leaders have repeatedly pledged that they would not resort to competitive currency devaluation to support exports, or use the currency as a tool to cope with trade disputes.

Zhu said the yuan will be supported by China’s solid economic fundamentals, a stable debt ratio, contained financial risks, adequate foreign exchange reserves, and favorable interest rate spreads between China and major advanced economies.

“Over the medium and long term, we have full confidence in RMB as a strong currency,” she said.

In the second quarter, China’s annual economic growth pace slowed to a near 30-year low of 6.2%. Many analysts had expected a steadying in the second half as earlier stimulus measures started to kick in, but Trump’s latest tariff threat is likely to further pressure exporters and their domestic supply chains.

China’s foreign exchange reserves – the world’s largest – fall by $ 15.54 billion in July to $ 3.104 trillion, central bank data showed, amid rising trade tensions.

China burned through $ 1 trillion of reserves supporting the yuan in the last economic downturn in 2015, during which it devalued the currency in a surprise move. Since then, Beijing has shored up restrictions on capital outflows.

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Forex News

Forexlive Americas FX news wrap: Dollar falls as safety flows ease. Stocks are happy.

Forex news for NY trading on February 15, 2019

In other markets:

  • Spot gold is up $ 8.88 or 0.68% at $ 1321.46
  • WTI crude oil futures are up $ 1.34 or 2.46% at $ 55.75

In the US debt market today, yields rebounded in the shorter end of the yield curve. Out the curve the gains were less.  

US yields were higher in the short end but lower in the back end

Despite the rise the modest rise in rates, the USD fell today. It is ending the session as the weakest of the major currencies (see ranked charts below).   The biggest declines were vs. the GBP and the commodity/risky currencies like the AUD, NZD and CAD.  For the GBP retail sales in the UK today were pretty good and although the impact was not really felt in the European session (the price moved up and down), the NY session saw London fixing buy flows that shot the pair above a the 50% midpoint of the year at 1.2834 and then the 100 hour MA and swing area at 1.2853.  The GBP survived another week of policital/Brexit unrest, the clock is ticking toward March 29th, but there still is hope that no-deal is averted.  

Commodities were higher today (gold, silver, oil, copper) which helped to boost commodity currencies. Those pairs also got boosts from hopes for a trade agreement with China and the US.   It was announced, that negotiations would continue in Washington next week.  Although Pres. Trump said he “loves tariffs” as it is bringing in billions of dollars of revenue, he also said that “there is a possibility to push back the trade deadline”.   He may love tariffs, but a trade deal would be better for alll. Putting it another way, 25% tariffs on $ 200B of imports would not be good (despite the billions of dollars of taxes).  The President also signed the new debt bill, which avoids another shut down.  Better news took some of the ‘risk fear” out of the currency rates.   

The % changes of the major currencies today
For the week, in the forex, the NZD was the strongest by far.  That pair, in addition to the hope on China, benefitted from a “less dovish” RBNZ and some short covering off the 100 and 200 day MAs.  The weaket currency was the JPY with most of the declines vs the NZD, CAD and AUD.   The USD was mixed on the week with modest gains vs the JPY, CHF, GBP and EUR and declines vs the NZD, AUD and CAD.  Below is a chart of the week’s changes.
The % changes for the week
The economic data today was mixed:
  • Empire manufacturing was better than expected
  • Export/import prices were lower than expected
  • Industial production and Cap. Utilization were both weaker than expectation
  • Univ. of Michigan sentiment for Feb was better than expected. 

That led to more chop then trend until the dollar selling kicked in later in the day.

Stocks ending the day and week at the highs.  The Dow industirals led the charge with a gain of 1.75% in the US.  European shared did even better with the German Dax up 1.89%

Stock changes today in US and Europe.

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