MNI INTERVIEW: China Data A Warning To Yuan Bulls-Guan Tao

The growing gap between data on China's trade surplus and cross-border receipts and payments may contain a warning for investors tempted to bet on an uninterrupted appreciation of the yuan, a former senior foreign exchange regulator official told MNI, predicting that the country's trade surplus will narrow in 2021.

According to data from Customs and the State Administration of Foreign Exchange, cross-border receipts and payments fell USD305 billion short of the trade surplus in the first 11 months of last year, as exporters' receipts slumped by USD254.9 billion even as November's surplus hit a record high USD75.4 billion, noted Guan Tao, former director general of balance of payments at the SAFE.

The differential between the data sets jumped 49% versus Jan-Nov 2019, probably because exporters have not transferred all of their profits back to China but also because some foreign buyers may be struggling to make promised payments, Guan said in an interview.

China has increased sales to developing markets in recent years, he said, adding that more signs of financial strain could appear in these countries if the Covid pandemic lingers or vaccine rollouts are delayed.

TRADE SURPLUS

A more protracted pandemic than currently factored in by investors would roil markets, and undermine the yuan, Guan said, adding that even smooth delivery of the Covid vaccine would not prevent a decline in China's trade surplus this year, as sales of personal protective equipment slow and the country's services deficit rises.

The yuan rallied more than 1.2% in the first three trading days of the year, and has now appreciated more than 9% against the dollar in seven months. The PBOC set its daily yuan fixing at 6.4608 to the dollar on Thursday. But Guan said the non-deliverable forward market (NDF) showed signs of a continued two-way bet on the currency in December. The annual Central Economic Work Conference, which sets China's policy agenda and was held last month, made its first reference to the exchange rate in three years, saying that the yuan should remain "at a reasonable and balanced level," in language repeated by the People's Bank of China on Wednesday.

The PBOC is likely to keep a close eye on funds coming into the country, with cross-border flows turning into a net inflow in November, Guan said. In a move aimed at opening up further channels for capital outflows, the central bank earlier in the week eased rules on foreign lending by Chinese companies.

If dollar weakness looks set to continue, exporters should diversify the currencies they use for pricing and settlement, Guan said. Choosing the euro, the Australian dollar or the Swiss franc would have proven an effective hedge for exchange rate risks in 2020, he added, noting that 90% of China's cross border receipts and payments are currently in dollars.