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Monday, June 21, 2010

China Currency at highest Level in Nearly Two Years........

Chinese currency strengthened Monday to the highest level in nearly two years in the biggest one-day move since 2005, an early indication that China would allow a gradual rise in the renminbi that it had hinted at over the weekend. Officials from Japan to Thailand to Germany on Monday hailed China’s pledge Saturday to “proceed further with reform” of the exchange rate and “enhance” flexibility as a potential boon to their exports and national economies. Many economists believe the stronger renminbi will increase the purchasing power of ordinary Chinese citizens and companies, helping promote global trade in one of the world’s largest markets.
But China on Monday continued to play down the significance of the renminbi’s value in helping to re-balance the global economy. A commentary in the state-run China Daily placed the onus on global leaders to overhaul the global financial system.
If leaders don’t to make progress at a forthcoming Group of 20 summit to overhaul the financial system, “the international community will soon find to its disappointment that its leaders look only for red herrings, rather than real solutions, at a time when true leadership is badly needed,” the commentary said.
By the close of business in Asia, the renminbi had advanced 0.42 percent to 6.7976 per dollar. Though seemingly small, the one-day gain is the largest in five years and marks an extraordinary change in China’s currency stance. China has hardly allowed the currency to budge over the past two years as it tried to promote its exports during the global economic and financial crisis.
At the same time, the announcement triggered an across-the-board rally in Asian and European equity markets as investors cheered the political and economic implications of the move.
The key market indexes in mainland China and Hong Kong rallied 2.9 percent and 3.1 percent, respectively, and the Nikkei 225 index in Japan closed 2.4 percent higher. European markets also were higher by midday.
Mainland Chinese airlines were among the biggest gainers in Shanghai: China Southern Airlines soared 8.1 percent, China Eastern jumped 5.6 percent, and Air China rallied 6.4 percent.
The reason: Investors believe that a rise in the Chinese currency will ultimately bolster passenger and cargo business while reducing airlines’ fuel costs. Because oil is denominated in dollars on the world markets, a rise in the renminbi would make oil cheaper for Chinese purchasers.
Oil also rose on expectations that a stronger renminbi will bolster demand from China. U.S. crude for July delivery rose $1.69 to as high as $78.87, its highest level since early May.
China’s announcement stopped well short of an all-out revaluation for the Chinese currency and provided little detail as to what the added flexibility for the renminbi would entail, or when it would be introduced.
And in a sign that underscored that the authorities in Beijing are in no hurry to initiate marked reform — a step that might fuel criticism at home that they were succumbing to pressure from abroad — the central bank on Monday left its reference rate for the currency unchanged from Friday’s level, at 6.8275 per dollar.
Officially the renminbi is allowed to trade as much as 0.5 percent below or above Beijing’s daily reference rate to the dollar, but in reality the divergence from that level has been much smaller over the past two years.
Monday’s gain showed a striking hands-off attitude on the part of Chinese authorities who manage the exchange rate. But analysts will closely watch Beijing’s announcement Tuesday morning of its daily reference rate to get a better sense of how swiftly China will allow financial markets to determine the renminbi’s level.
The weekend’s statement and Monday’s gains in the currency were widely interpreted as a precursor to a gradual and modest appreciation of the renminbi, which has been informally pegged against the dollar since the middle of 2008.
That policy has caused political tensions with the United States: Many economists and U.S. policy makers believe that the renminbi exchange rate is artificially low, giving Chinese exporters an unfair competitive advantage over U.S. manufacturers.
Saturday’s announcement, coming just days before the G-20 meeting of world leaders in Canada later this week, appeared aimed at defusing the currency debate and shifting the focus of the meeting toward other issues, like Europe’s debt troubles, analysts said.
The renminbi is a political tool. Clearly the timing of the move was politically determined. It is not an economic tool yet. This will take years, not days or weeks,” Bill Belchere, a global economist at Mirae Asset in Hong Kong, wrote in a note Monday. He added: “This is a move in the right direction: politically and economically. Market disappointment may grow if China’s actions remain slow and don’t add up to real shift in policy. But the verdict is out.”
Economists at Bank of America Merrill Lynch echoed this, writing in a note that although they did not expect a significant appreciation against the dollar, Saturday’s announcement was a “key step for Chinese macro policy.”
Foreign exchange flexibility would help China to control asset price bubbles and reduce the threat of protectionism, economists believe.
The stock markets took the news unequivocally well, shrugging off both the lack of clarity on the timing and likely small size of any actual appreciation.
Most analysts expect Beijing to allow an increase of between only 2 percent and 5 percent by the end of the year. A Reuters survey Monday showed that economists broadly expected the renminbi to end 2010 at 6.67 per dollar.

In addition to China and Japan, major indexes elsewhere also gained, with rises of 1.8 percent in Singapore, 1.9 percent in Taiwan and 1.6 percent in South Korea. The Sensex in India was 1.7 percent higher in late trading, and the benchmark index in Australia closed up 1.3 percent.
Consumer goods companies and overseas companies that export their goods and services to China are seen as the biggest winners of a stronger renminbi.
The Swiss watch maker Swatch rose 5.6 percent by early afternoon in Europe, and the French luxury groups LVMH and Richemont climbed 3.2 percent and 4.6 percent, respectively.
The exact impact on companies will depend to a large extent on how much they export to and from China and whether they have manufacturing operations there.
Longer term, analysts said, a renminbi appreciation could have far-reaching macroeconomic implications.
An appreciation of the renminbi against the yen is “clearly good for Japanese companies that stand to benefit from growth in the Chinese market,” analysts at Nomura wrote in a note on Monday, though they added that it also would have some negative implications for Japanese companies that have manufacturing operations in China and that export to other regions.
The Japanese finance minister, Yoshihiko Noda, said he expected the move “to be a plus for the China and Asia economies as well as the world economy. Basically I welcome it,” Reuters reported.
And Bandid Nijathaworn, the deputy governor of the Thai central bank, said gains in the renminbi, also commonly known as the yuan, would buoy exports to China and help reduce trade imbalances in the long term. “China is a Thai export market. If the yuan strengthens and our exports can still compete with others, we should benefit,” he said, according to
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