Depec-Bradesco Economic Highlights

Transcription

1 Depec-Bradesco Economic Highlights Year XIII Number June, Pressure for a moderate depreciation of the Chinese currency will continue in the short term Fabiana D Atri Macroeconomic Research Department The behavior of the Chinese currency has always been a key variable to understand its economy. More notably, since the country s admission into the WTO in 2001, the exchange rate policy has been strategic and fundamental for fast and significant share gain in several markets, placing China today in the position of the largest exporting nation in the world. This has helped to drive the economy s expansion, which has long been based on the growth model geared toward exports. During this period, the currency was maintained at depreciated levels, as one of the tools for competitiveness. However, especially since the 2008 crisis, China has faced structural challenges and transformations, which necessarily require the strengthening of the domestic market and the opening of the economy, with direct impacts over the exchange rate policy. The Chinese renminbi (CNY) - after strong cumulative adjustments in recent years, now 5,0% 4,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% -6,0% -7,0% -0,2%-0,2% ,0% 0,0% ,5% -3,3% -6,5% -6,26% 0,0% After a long time in a stable level, the Chinese renminbi varied again in 2005 and since then - with exception of the period right after the 2008/2009 crisis it has been gradually and continuously adjusted. From 2005 to 2016, ,5% -4,4% 2010 close to being stable - has brought uncertainties to markets and companies from China and worldwide. Recent reforms in the exchange market have increased its volatility, while advances in the currency s internationalization process and confusions in the communication to the market have led to wagers on the currency s depreciation, more or less expressive when one analyzes current expectations of analysts and companies. This can be observed, for instance, through the great capital outflow seen last year. We believe the pressure for the currency s depreciation will continue this year, in view of the expected valuation of the dollar. However, this will be a moderate movement and the Chinese monetary authority will soften the pressures from global currency markets, avoiding calibrations all at once. We thus expect a depreciation of about 5% this year, close to the one seen last year ,1% ,8% ,5% ,6% 4,7% ,2% 2017 Renminbi annual change Production and forecast: BRADESCO the currency was valuated by nearly 55% in real terms and 21% in nominal terms in relation to the dollar. More recently, the currency has fluctuated in both directions, reducing the predictability of its movements. It is worth remembering the event 1

2 of August last year, when the Chinese Government decided to implement a strong correction of the currency at once, allowing the RMB to depreciate by almost 5% in a few days, soon after the fall of stock markets in July. Earlier this year, and also surprisingly, the currency lost about 2% of its value throughout January when a reasonable amount of resources left the country. After this, the RMB has already appreciated and depreciated again, revealing a considerable raise in volatility, as illustrated in the graph that follows. In this year, up to mid-may, the Chinese renminbi appreciated by about 1.0% against the dollar and depreciated by 4.0% in relation to the currency basket. Real change Nominal change dec/ % 2.49% dec/ % -3.24% dec/ % -6.46% dec/ % -6.43% dec/ % -0.09% dec/ % -3.01% dec/ % -4.86% dec/ % -0.24% dec/ % -3.00% dec/ % 0.36% dec/ % 6.12% apr/ % -0.53% % -22.0% RMB/US$ Exchange rate Source: CEIC RMB/US$ and effective real exchange rate (available until March 2014) ,8 88,5 7,57 95,6 99,6 real exchange rate (inverted axis), 2005=100 nominal exchange rate, right axis 8,4 8,0 7, Apreciação 6,83 107,5 6,35 6,34 6, ,2 6,8 6,46 126,1 6,4 6,9 6,6 6,3 6,0 6,81 6,89 6,84 6,83 6,81 Source: CEIC, BIS ,28 6, , /06/08 01/09/08 01/12/08 01/03/09 01/06/09 01/09/09 01/12/09 01/03/10 01/06/10 01/09/10 01/12/10 01/03/11 01/06/11 01/09/11 01/12/11 01/03/12 01/06/12 01/09/12 01/12/12 01/03/13 01/06/13 01/09/13 01/12/13 01/03/14 01/06/14 01/09/14 01/12/14 01/03/15 01/06/15 01/09/15 01/12/15 01/03/16 01/06/16 Lately, important changes were introduced that deserved attention. One of such changes refers to the daily variation range (currently 2%, upwards and downwards), given that the currency s value is set daily by the central bank. Furthermore, at the end of last year, the Government announced the establishment 136 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 6,41 6, , China: exchange rate (RMB/ US$) of a reference basket for the currency s fluctuation, based on its major trading partners. Thus, in less than a year, there were two main changes: In August 11, 2015, the central bank changed the reference pricing mechanism for the exchange rate, 6,0 2

3 in wich the opening price for negotiation is defined according to the China Foreign Exchange Trade System 1 (CFETS), every morning, based on market movements of the previous day. In December 11, 2015, two weeks after the RMB was included in the SDR, an article was posted on the central bank s site 2 indicating that CFETS would start publishing a reference basket for the exchange rate variation, composed by 13 currencies weighted by trade. The central bank revealed the basket s composition and the weights of these currencies 3. We must remember that China has as a reference the currency model adopted by Singapore when we consider which will be the next steps in the reform and opening of the foreign exchange market. Since 1980, the country established a scheme known as BBC - basket, band and crawl. The currency is thus managed based on a basket, oscillating within a daily band, allowing milder variations rather than sudden adjustments (such as those observed in markets that operate with free floating). The basket s composition is changed often, but this is not disclaimed and the oscillations depend on a change in the monetary policy. When we take the recent movements of the Chinese foreign exchange market, we notice similarities, with expansions of the daily variation band in recent years and, more recently, with the establishment of a reference basket and the setting of a daily rate. This suggests that, contrary to some expectations, movements will continue smoothly and the exchange rate will remain being administered by the Chinese authorities. In view of these adjustments, both financial agents and companies have raised their bets on the tendency of a smooth and continuous depreciation over the next few years. In fact, the fall of approximately US$ 700 billion in the country s reserves, since mid-2014, resulting from capital outflows, reveals these expectations. Even then, after the strong outflow in December last year and January this year, reflected by a fall in reserves of US$ billion in these two months alone, it seems that the Government has managed to control the flow. As an alternative measure to the flow, we monitored the net position of banks in foreign currency which can be seen in the graph below. In fact, we can notice that the outflow of resources in March and April lost strength. In the following table, we have the forecasts by the main market analysts and the value of the currency suggested by future curves, according to data from Bloomberg 4. This trend is expected to continue over the next few years, but at a gentle pace - taking into account the pattern of Chinese policies, which are usually marked by gradualism. Forecast and value suggested by the curves for the exchange rate (RMB/US$) 2T16 3T16 4T16 1T Forecast Value suggested by the future curves (*) on 06/07/ ,0 100,0 43,4 50,0 0,0-50,0-51,0-100,0-150,0 Apr-10 Jun ,6 24,9-60,8 72,1 33,9-6,3 98,5-19,7-92,8 net position in foreign in banks (excluding bank operations) monthly variation of foreign reserves Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun ,7 Aug-13 Oct-13 Dec-13 76,3 Feb-14 Apr-14 15,2 Jun-14-81,1 Aug-14 China: net position in foreign currency in Chinese banks (US$ billion) and monthly variation of reserves Source: CEIC 1 Arm of the central bank, responsible for interbank negotiations 2 consulted on 05/19/ These are the currencies and their respective weights: USA (26%), Hong Kong (7%), Japan (15%), United Kingdom (4%), Australia (6%), Euro Area (21%), New Zealand (1%), Singapore (4%), Switzerland (1%), Canada (3%), Malaysia (5%), Russia (4%) and Thailand (3%). 4 Reference also to the text of Nicholas Lardy, 4-outlook-renminbi, consulted on 05/23/2016 Oct-14 Dec-14 Feb-15 Apr-15 8,9 Jun-15 11,4-128,0 Aug-15 Oct ,9 Dec-15 Feb-16 Apr-16 7,

4 The expectation of depreciation, in turn, is based on several factors, mainly conjunctural. The slower Chinese growth, weak exports and the fact that the currency has already appreciated by almost 55% in real terms since 2005 are highlighted. Reserves, on the other hand, would be falling rapidly on account of the capital outflow resulting from the expectation of the currency s depreciation. As important as these domestic vectors, we have to consider that the expected valuation of the dollar a trend that may be intensified throughout the current and the next few years will increase the market s expectation of a more expressive currency depreciation. In fact, if we remember the RMB s movement in mid-april, when the Government established the valuation of 0.5%, the highest in the last 11 years, it was the day in which the dollar devalueted signicantly, in response to signs that the Fed would take longer than expected to resume normalization of its monetary policy. It is worth remembering that the opposite tends to happen when the Fed increases the interest rate again. Regarding these expectations, the consensus is that the Chinese central bank will be able to ease the pressure from the dollar through the currency basket, as it has done throughout this year. This allows a slight loss in relation to the US currency by imposing some appreciation of the RMB against the basket. However, there are still concerns with this administration of the foreign exchange market, since the reference for practical transactions continues to be the bilateral relationship between the Chinese renminbi and the dollar. At the same time, we must consider that a strong depreciation of the RMB would bring turmoil to the world markets, preventing the Fed from raising the interest rate at a very strong and fast pace ,19 6,19 101,8 101,2 102,4 105,7 102,2 6,39 100,5 103,2 currency basket CNY/US$ 100,8 6,45 6,13 6,23 6,33 6,43 China: currency basket index (CFETS index) and CNY/US$ (in inverted scale) ,49 6,59 6,55 6,49 6,53 97,4 96,5 6,63 03/01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/ /01/ /02/ /03/ /04/ /05/2016 Therefore, there have been important advances towards internationalization and in the manner of conducting the foreign exchange market, in an attempt to link more and more movements of the RMB to the market s behavior and to make it less dependent on the dollar. Since 2007, the Chinese Government has been progressing in initiatives to internationalize its currency. Initially, the so-called dim sum bonds and the offshore market were created for the bonds denominated in local currency, in Hong Kong. The other internationalization front, which began in 2008, comes from commercial relations traded exclusively in the Chinese currency, which reached 17% of the total volume sold by China in In addition, the use of RMB in the global marketplace will have a growing trend, accentuated by the various foreign exchange swap agreements signed with various countries 5 since More geared towards the capital market, since 2010, there has been the possibility of foreign investors allocating resources in the Chinese market and, with the creation of the Shanghai Free Trade Zone in 2013, these pilot projects have been increasing fast. Finally, in the end of 2015, the International Monetary Fund (IMF) announced the inclusion of the Chinese renminbi as the fifth currency to make up the Special Drawing Rights (SDR), a reserve currency basket, with the Chinese participation of 10.92% (while the dollar, euro, pound sterling and yen contribute with 41.73%, 30.93%, 8.09% and 8.33%, respectively 6 ). This inclusion will take place as of October 2016 and plays a very important symbolic role as it represents one more step of many towards internationalization of the Chinese currency - which will require, for example, the opening of the capital account and the development of an international market of Chinese Government bonds 7. In a recent lecture, Eswar Prasad brought an excellent summary of these major advances in the Chinese currency regime 8. 5 Like Argentina, Brazil, Canada, Korea, Singapore, the European Union, United Kingdom, Hong Kong, Indonesia, Thailand. 6 The basket was last reviewed in 2010, being reviewed every 5 years. 7 This market is still very small. According to the Chinese central bank, with reported information in the Barclays report, foreign investors held billion RMB (U$ 120 billion) in domestic bonds in September consulted on 05/23/

5 However, it is important to keep in mind that the currency is not overvalued, meaning that it does not require a very sharp depreciation. Recent statements, including one by the IMF, confirm this reading 9. China keeps gaining ground in world trade, especially in higher value-added products; the current account surplus is still high, although there is a downward trend for the future, and a significant part of the fall in reserves is also explained by the valuation of the dollar against other currencies (it is estimated that a quarter of the fall is the effect of the currency). In addition, the capital outflow is mostly due to Chinese companies that are repaying their debts that were in foreign currencies and to foreigners reversing carry trades, on account of the change in expectations regarding currencies and interest rates (falling in China and rising in the US). This flow tends to decrease because a large part of the loans of Chinese companies has already been paid and the stock of foreign financial capital available to repatriate has reduced Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 3, China: foreign reserves (US$ billion) Taking this into account, we believe that the pressure in the short term is towards depreciation. However, in the medium and long terms, the RMB should appreciate, as internal reforms in the country indicate a move to liberalization and flexibilization of foreign exchange markets and Government bonds. The RMB may therefore take on the nature of a reserve currency, with international demand for allocations of reserves and sovereign wealth funds. This expectation is reinforced by the fact that (i) the current account surplus will continue in the next few years, given the IMF s forecast of about 1% of the GDP, (ii) reserves remain high and (iii) the country remains the largest holder of US Government bonds , , , , , , ,83 2,54 1,56 2,11 2,67 2,60 At the same time, there are also the acquisitions made by Chinese companies on a global scale and in significant volumes. Increasing the trend of the last decade, Chinese corporations privately and state-owned have announced purchases of the most diverse businesses, including major multinationals, in the search for new markets, technology acquisition, expansion of economic and , , , ,66 0, Current account balance as proportion of the GDP (%) Source and forecast: IMF, social influence, as well as resources acquisition. It is natural to think that Chinese companies, distributed across the world, will force greater use of the Chinese renminbi in their transactions between affiliates and their suppliers who are across many countries. Thus, the trend of increased demand for the RMB due to increased internationalization of the currency - is enhanced. 9 consulted on 06/03/2016 and and consulted on 05/19/2016 5

6 Team Octavio de Barros - Macroeconomic Research Director Fernando Honorato Barbosa Global economics: Fabiana D Atri / Felipe Wajskop França / Thomas Henrique Schreurs Pires / Ellen Regina Steter Brazil: Igor Velecico / Estevão Augusto Oller Scripilliti/ Andréa Bastos Damico / Myriã Tatiany Neves Bast / Daniela Cunha de Lima / Ariana Stephanie Zerbinatti Brazilian sectors: Regina Helena Couto Silva / Priscila Pacheco Trigo Proprietary survey: Leandro Câmara Negrão / Ana Maria Bonomi Barufi Internships: Gabriel Marcondes dos Santos / Wesley Paixão Bachiega / Carlos Henrique Gomes de Brito - BRADESCO does not accept responsibility for any actions/decisions that may be taken based on the information provided in its publications and projections. All the data and opinions contained in these information bulletins is carefully checked and drawn up by fully qualified professionals, but it should not be used, under any hypothesis, as the basis, support, guidance or norm for any document, valuations, judgments or decision taking, whether of a formal or informal nature. Therefore, we emphasize that all the consequences and responsibility for using any data or analysis contained in this publication is assumed exclusively by the user, exempting BRADESCO from all responsibility for any actions resulting from the usage of this material. We all point out that access to this information implies acceptance in full of this term of responsibility and usage. The reproduction of the content in this report (partially or in full) is strictly forbidden except if authorized by BRADESCO or if the sources (the name of the authors, publication and BRADESCO) are strictly mentioned. 6