The USD/CNY Adjustment Is It Complete?

Transcription

1 The USD/CNY Adjustment Is It Complete? Derek Halpenny European Head of Global Currency Research European Central Bank June 29 1

2 Substantial REER Appreciation 1 USD/CNY vs Renminbi REER G7 Calls for Effective Exchange Rate Adjustment 1 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 USD/CNY (Left) BIS Real Broad Effective Exchange Rate Index, Average - China, Peoples Rep of (Right) 9 8 2

3 Investment Surge to Limit Real GDP Drop China Real GDP vs Export Growth Annual % GDP, (Left) Annual % Exports China Urban Fixed Asset Investment Annual cumulative % The worst export performance on record Strongest pick-up since 24 3

4 Fiscal Stimulus Already Impacting Growth Fixed Asset Investment Growth - Government Sourced Funds 2, 1, -1, -2, -3, General Government Fiscal Balance -2 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 Annual % Fix Asset Inv. By Source of Funds State budgetary funds, Cumulative - China, -4, '83 '85 '87 '89 '91 '93 '95 '97 '99 '1 '3 '5 '7 '9 General Government Deficit/surplus Total, CNY 1 mn- China, Peoples Rep of Government financed investment surges Favourable government debt position 4

5 China Exports - US Share Reduced China Exports by Main Regions Exports by Region Rebased from June 25 Renminbi Peg Abandoned '99 ' '1 '2 '3 '4 '5 '6 '7 '8 Exports USA, USD bn - China, Peoples Rep of Exports Asia, USD bn - China, Peoples Rep of Exports EU, USD bn - China, Peoples Rep of '99 ' '1 '2 '3 '4 '5 '6 '7 '8 (INDEX) Exports Asia, USD - China, Peoples Rep of (INDEX) Exports USA, USD - China, Peoples Rep of (INDEX) Exports EU, USD - China, Peoples Rep of EU as export destination surpasses US Export growth to the US has lagged since peg abandoned 5

6 But Import Growth from Asia Underperforms 8 China Imports by Main Region 25 Import Growth by Region Rebased Renminbi Peg Abandoned '99 ' '1 '2 '3 '4 '5 '6 '7 '8 Imports Asia, USD bn - China, Peoples Rep of Imports USA, USD bn - China, Peoples Rep of Imports EU, USD bn - China, Peoples Rep of '99 ' '1 '2 '3 '4 '5 '6 '7 '8 (INDEX) Imports USA, USD - China, Peoples Rep of (INDEX) Imports Asia, USD - China, Peoples Rep of (INDEX) Imports EU, USD - China, Peoples Rep of China imports from Asia account for 62% of all imports Import growth from Asia lagging Lack of diversification in Asian imports 6

7 China demand for US assets persists China Holdings US Securities and Deposits China Reserves vs US Treasury Purcchases - UK 9, 8, 7, 3, 25, Correlation:.96 5, 6, 2, 4, 5, 4, 3, 2, 1, '3 '4 '5 '6 '7 '8 '9 TIC China Holdings US Treasury Securities, USD mn TIC China Holdings US Agency Bonds TIC China Holdings US Equities TIC China Holdings US Corporate Bonds TIC China US Dollar Deposits Risk appetite shifts dramatically 15, 1, 5, -5, '99 ' '1 '2 '3 '4 '5 '6 '7 '8 12-mth sum - Reserves Foreign exchange reserves, USD mn - China (Right) 12-mth sum - TIC Net Purchases UST Bonds and Agency Bonds, USD mn - US (Left) Official TIC data a considerable under-estimate 3, 2, 1, 7

8 Hot Money Flows Reverse Sharply 6 FX Reserves vs Trade and FDI Balance 5 Pace of Change in USD/CNY Sharp Acceleration in Hot Money Flows Emergence of Hot Money Flows '99 ' '1 '2 '3 '4 '5 '6 '7 '8 12mth Sum - Trade Balance Total, USD - China, + FDI Balance, China, USD bn 12mth Change - Foreign exchange reserves, USD - China, USD bn -2 7/7 1/7 1/8 4/8 7/8 1/8 1/9 4/9 Annualised Q/Q Change - Spot Rates CNY/USD, Close Daily - China Speculative pressures turn to outflows Peak in CNY appreciation pace coincides with peak speculation 8

9 FDI Flows to Become More Balanced 16, FDI - Inflows vs Outflows 2, FDI Signed Contracts 14, 12, 1, 18, 16, 14, 12, 8, 1, 6, 8, 4, 6, 2, 4, 2, -2, '99 ' '1 '2 '3 '4 '5 '6 '7 '8 BOP Financial Account FDI Net Inflow, USD mn - China, Peoples Rep of BOP Financial Account FDI Net Outflow Abroad, USD mn - China, Peoples Rep of '3 '4 '5 '6 '7 '8 Signed FDI Contracts - Manufacturing Sector, China Signed FDI Contracts - Wholesale and Retail Trade, China FDI outflows up 194% in 28 Manufacturing FDI inflow still around 5% of total 9

10 Financial Market Development Progressing 7, 6, 5, 4, 3, 2, 1, China Bond Repurchase Turnnover Daily USD/CNY % Change From PBOC Fixing '3 '4 '5 '6 '7 '8 '9 China Bond Repo Turnover, CNY 1 million -.4 1/6 4/6 7/6 1/6 1/7 4/7 7/7 1/7 1/8 4/8 7/8 1/8 1/9 4/9 % Change from CNY/USD Daily Fixing Rate - High % Change from USD/CNY Daily Fixing Rate - Low Market determined yields gradually taking precedence USD/CNY spot FX turnover rising sharply? 1

11 The Internationalisation of the RMB Recent Swap Agreements Announced by PBOC Date Countries Amount (Billion RMB) China State Council approves Shanghai Development by 22 Mar-9 Mar-9 Argentina Indonesia 7 1 PBOC capital account regulations relaxed - 27 th May Mar-9 Belarus 2 A further expansion of currency swap lines expected Feb-9 Jan-9 Malaysia Hong Kong 8 2 RMB trading zone in greater China Hong Kong and Taiwan Dec-8 South Korea 18 Increased RMB settlement use in Shanghai & Pearl River Delta Total 65 RMB bond issuance authorization granted outside of China 11

12 Changes in GDP Structure Will Be Gradual 6 China Real GDP - Compositions Short-term Measures to Boost Consumption Consumer Subsidies Increased Consumer Access to Credit '84 '85 '86 '87 '88 '89 '9 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 Gross Capital Formation % GDP Household Consumption % GDP Net Exports % GDP Government Consumption % GDP Long-term Measures to Boost Consumption Social Security Reform Rural Income Growth 12

13 International Politics Also Crucial New Approach to Dealing with China by the Obama Administration? o Geithner visit in June underlined new phase in relationship o Now more mutually beneficial to strengthen relationship New Frenemies Financial Crisis has reduced tensions in regard to USD/CNY movements o Banking sector recovery, financial market regulation the new focus of US Congress But EU could be the origin of next bout of international pressure o No CNY adjustment versus EUR since July 25 unpegging 13

14 US Dollar To Recover in Household Borrowing via Financial Markets % GDP 1 Current optimism unlikely to persist Inflation concerns and dollar selling will ebb '47 '5 '53 '56 '59 '62 '65 '68 '71 '74 '77 '8 '83 '86 '89 '92 '95 '98 '1 '4 '7 Household Borrowing via Financial Markets % GDP Recession Periods - United States US financial markets will remain no. 1 destination helped by continued demand from China 14

15 Conclusion Little further USD/CNY adjustment over the remainder of 29 and 21 USD/CNY 6-month forecast 6.8 USD/CNY 12-month forecast 6.75 But this equates to renewed CNY appreciation on an effective basis Further 5.-8.% effective appreciation from later this year EUR/CNY return toward 28 lows in 21 15

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