MNI INTERVIEW: Yuan Rally To Depend On Stimulus, Fed- Guan Tao

The offshore CNH yuan rate is on course for a fast rally to 6.9 to the dollar but further substantive gains by the currency will largely depend on fresh fiscal stimulus and the pace of Federal Reserve easing, a prominent Chinese foreign exchange expert told MNI, adding the proviso that too sharp an appreciation would be contained by the PBOC.

Positive momentum following a major package of monetary policy stimulus announced by the People’s Bank of China last Tuesday and Thursday’s signalling by the Politburo of further moves could in the short term push the yuan somewhat higher following CNY’s march to 7.01 from around 7.27 at the end of July on increasing expectations of U.S. rate cuts, said Guan Tao, global chief economist at BOCI China. (See MNI:More RRR Cuts Would Pave Way For China Bond Sales-Advisors)

But beyond that, the currency is likely to fluctuate over the rest of the year, given uncertainty around the strength of economy in both China and the U.S, said Guan, a former official at the State Administration of Foreign Exchange, pointing to doubts over whether the U.S economy will manage a soft landing.

Still, Chinese companies need to be hedged, with gains of 4% from the yuan’s weakest point against the dollar this year potentially squeezing exporters' profits and reducing gains from dollar carry trades, he warned in an interview.

PBOC

The PBOC will insist on its policy stance of maintaining forex market stability and act against any overshooting of the exchange rate, he said. The CNY onshore rate has been consistently stronger than the PBOC’s fixing as the currency pushed through 7.1, with the CNH offshore rate stronger still. CNY appreciated by 1.9% in August, with the fixing price only gaining 0.3%, he pointed out.(See MNI INTERVIEW: China Yuan To Find Support in H2)

The breach between the market rates and the fixing had previously narrowed in the weeks following Aug 6 as pressures pushing the yuan to depreciate in the first half of the year faded.

The larger-than-expected easing measures announced by PBOC Governor Pan Gongsheng helped tip the yuan through 7.0 against the dollar in offshore markets last Wednesday for the first time since May, though the yuan daily fixing remained stable above 7.0. USDCNH probed 6.97 by Friday, according to data from Wind.

FISCAL STIMULUS

Additional Chinese fiscal moves, including more debt issuance, are likely to come soon as officials try to ensure economic growth meets the 5% annual target, said Guan. An anonymous advisor told MNI on Tuesday that the government is likely to boost bond issuance by more than CNY1 trillion to meet a CNY1.5 to 2 trillion fiscal gap this year.

Prompt and large-scale fiscal stimulus and central government borrowing will be crucial to ensure monetary easing is effective in boosting the economy and continuing to shore up market sentiment, said Guan, adding that slow government debt issuance in the first half of the year sapped demand.

Local government borrowing slid 33.3% year-on-year in the first half to just CNY1.83 trillion, well short of the CNY4.6 trillion quota for new debt granted earlier in March, Ministry of Finance data shows.

Given that local government borrowing has been constrained by a shortage of profitable projects to spend on, fiscal stimulus should focus more on bolstering consumption, Guan said. Spending in areas such as healthcare, education and care for the elderly could reduce citizens’ propensity to save and boost consumption, he suggested.