Posts Tagged ‘International Monetary Fund’

Global Stocks Struggle to Shrug Off China Fears — Economic and Political Reforms Needed May Seem Impossible In Totalitarian Communist State

August 26, 2015

China’s troubled economy and stock market sent shivers through many markets

Global markets struggled Wednesday to shrug off fears of a deepening Chinese economic slowdown, which has roiled stocks in recent sessions.

European stocks opened lower, tracking a late tumble in U.S. markets Tuesday that dashed hopes of a return to stability.

The Stoxx Europe 600 index opened 2.0% lower, following a 4.2% gain on Tuesday. Germany’s DAX lost 2.0%, France’s CAC 40 was down 2.2%, and the U.K.’s FTSE 100 was 1.7% lower.

The losses followed another volatile session in Chinese markets, as fresh measures to ease monetary policy late Tuesday failed to settle investors’ nerves. China’s central bank cut interest rates and flooded its banking system with liquidity via a cut to banks’ reserve ratio requirements. The Shanghai Composite Index swung between gains and losses before closing 1.3% lower.

On Tuesday, the Dow Jones Industrial Average had closed 1.3% lower after an early rally melted away.

U.S. stock futures suggested a modest rebound on Wednesday, indicating opening gains of around 0.5% for the Dow Jones Industrial Average and S&P 500. Changes in futures aren’t necessarily reflected in market moves after the opening bell.

Oil prices edged higher after Tuesday’s gains, with Brent crude 0.3% higher at $43.30 a barrel.

In currency markets, the euro fell 0.3% against the dollar to $1.1495. The dollar strengthened 0.7% against the yen to ¥119.515.

Write to Chiara Albanese at chiara.albanese@wsj.com

**************************

Political Risks May Foil Economic Reform in China

By Edwardo Porter
The New York Times

Can China pull it off?

A couple of weeks ago, the International Monetary Fund told the world that China was essentially doing O.K. It is “transitioning to a new normal,” theI.M.F. said in its regular economic assessment, toward “slower but safer and more sustainable growth.” The main risk, it argued, was that the Chinese government’s push for economic reform might prove “insufficient.”

It seems this is a pretty big risk.

Financial markets were shaken by China’s decision to abruptly devalue its currency on Aug. 11, days ahead of the publication of the I.M.F. report.

For all the I.M.F.’s assurances that this was a minor adjustment after a sharp appreciation of the currency until then, a welcome step that “should allow market forces to have a greater role in setting the exchange rate,”investors seem to have taken it as an unsettling signal that the Chinese authorities are desperate.

Read the rest:

http://www.nytimes.com/2015/08/26/business/economy/chinese-economy-faces-risks-from-political-instability.html?hp&action=click&pgtype=Homepage&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

Related:

.
.
.
.
.

From Monday, August 24, 2015 and earlier:

.

***

IMF official says ‘premature’ to speak of Chinese ‘crisis’ after market crash, devaluation of yuan

August 22, 2015

Reuters

China’s economic slowdown and a sharp fall in its stock market herald not a crisis but a “necessary” adjustment for the world’s second-biggest economy, a senior International Monetary Fund official said on Saturday.

Fresh evidence of easing growth in China hammered global stock markets on Friday, driving Wall Street to its steepest one-day drop in nearly four years.

“Monetary policies have been very expansive in recent years and an adjustment is necessary,” said Carlo Cottarelli, an IMF executive director representing countries such as Italy and Greece on its board.

“It’s totally premature to speak of a crisis in China,” he told a press conference.

He reiterated an IMF forecast for a 6.8 per cent expansion in the Chinese economy this year, below the 7.4 per cent growth achieved in 2014.

“China’s real economy is slowing but it’s perfectly natural that this should happen … What happened in recent days is a shock on financial markets which is natural,” he added.

China’s stock markets have fallen more than 30 per cent since mid-year. Following a slew of poor economic data, Beijing devalued the yuan in a surprise move last week.

Cottarelli said the IMF would discuss in coming months with Chinese authorities their decision to weaken the currency.

China is eager for the yuan to join the IMF’s Special Drawing Rights basket of currencies. But the fund is considering extending the current SDR basket by nine months until September 30, 2016.

Turning to Greece, which is heading to an early election in September, Cottarelli said the IMF would decide in two or three months whether to join the latest international rescue efforts.

The IMF deems Greece’s debt unsustainable and has called for debt relief as a condition to participate in a third bailout.

“The debt sustainability assessment will take place after the launch of the programme [agreed with creditors] in two or three months. The IMF will then be able to evaluate whether to intervene,” he said.

Related:

 

China must wait to join currency club

August 21, 2015

.The International Monetary Fund indicated this week that it won’t add the yuan to an international basket of reserve currencies for at least a year.

The International Monetary Fund indicated this week that it won’t add the yuan to an international basket of reserve currencies for at least a year.Photo: Kim Kyung-Hoon/Reuters

From AP and Bloomberg

China must wait until at least next year to join an exclusive club of the world’s top currencies, the IMF said on Wednesday.

The IMF board voted to leave unchanged until Sept. 30 next year a basket of currencies used in IMF operations, known as the Special Drawing Rights (SDR).

China, the world’s second- biggest economy, had wanted the IMF to include the yuan in the basket along with the US dollar, euro, British pound and Japanese yen starting on Jan. 1.

Unlike the other currencies in the basket, the yuan does not trade freely. China sets a daily target and lets the yuan trade 2 percent higher or lower.

IMF Managing Director Christine Lagarde and Chinese Premier Li Keqiang meeting in Beijing in March.
IMF Managing Director Christine Lagarde and Chinese Premier Li Keqiang meeting in Beijing in March. Photo: European Pressphoto Agency

The Washington-based IMF only conducts its SDR review every five years and that might have accelerated China’s efforts to get the yuan included.

Last week, Beijing devalued the yuan and said it would give market forces more say in determining the exchange rate — a move the IMF praised as a step in the right direction.

The yuan in Shanghai is now allowed to trade as much as 2 percent on either side of the People’s Bank of China’s (PBOC) reference rate.

The IMF, which rejected the yuan in 2010 on the grounds that it was not “freely usable,” called China’s move a “welcome step,” while cautioning the change had no direct effect on the SDR review.

The SDR basket is a virtual currency the IMF can use for emergency loans and the fund’s member countries can use to bolster their own reserves in times of crisis.

Joining the basket would give the yuan the IMF’s seal of approval and might encourage foreigners to use the Chinese currency and to have more confidence in China’s financial markets.

The yuan yesterday rose on speculation the PBOC intervened to support the currency after the IMF decision.

It closed 0.1 percent higher at 6.3890 per US dollar in Shanghai, according to China Foreign Exchange Trade System prices. It fell as much as 0.08 percent earlier.

In Hong Kong’s offshore market, the freely traded yuan fell 0.08 percent to 6.4465 per US dollar as of 4:51pm, according to data compiled by Bloomberg.

“The IMF executive board vote is slightly negative for the yuan today as the inclusion will be delayed,” said Banny Lam (林樵基), co-head of research at Agricultural Bank of China International Securities (中國農業銀行國際證券) in Hong Kong. “That said, any major yuan depreciation is unlikely in the near term after such a big adjustment last week. It’s time for some stability.”

Additional reporting by Bloomberg

http://www.taipeitimes.com/News/biz/archives/2015/08/21/2003625822

Related:

China’s Resistance to Reform May Grow With IMF Rejection

August 20, 2015

.

China: Beijing’s efforts to stabilize markets already suggest policy makers want to loosen only gradually

The International Monetary Fund indicated this week that it won’t add the yuan to an international basket of reserve currencies for at least a year.
The International Monetary Fund indicated this week that it won’t add the yuan to an international basket of reserve currencies for at least a year. Photo: Kim Kyung-Hoon/Reuters

BEIJING—Political support in China for economic reform, already weakened by the specter of slowing growth, may be further dented by the International Monetary Fund’s indication this week that it won’t add the yuan to an international basket of reserve currencies for at least a year.

The IMF’s disclosure follows a decision in June by index provider MSCI Inc. MSCI -1.68 % not to include China’s shares in a global stock index. They signal that many feel Beijing hasn’t done enough to loosen government control and open its vast financial market to the rest of the world.

But China increasingly views greater integration with global markets as problematic, analysts said. Beijing’s efforts in recent weeks to stabilize the country’s stock and currency markets, they said, suggest policy makers want to loosen only gradually and are less likely to bow to international pressure.

“The government’s focus in the near term is on keeping growth at a reasonable level and controlling risks,” said one economic adviser to the Chinese leadership. With demand at home sluggish, export markets soft and the property market weak, growth in the world’s second-largest economy in 2015 is expected be the slowest in 25 years.

Given their recent policies favoring stability over reform, China’s leaders have come to view the yuan’s inclusion in the IMF’s special drawing rights as increasingly unlikely, say people close to the government.

China has benefited from more-open trade links during its more than three-decade rise out of poverty. But the Communist Party remains wary of the power and volatility of global markets, and their potential for fomenting social instability.

“After many years of feeling the waters ourselves and observing the U.S. subprime crisis and problems in Greece, there’s a sense there’s no particular checklist for what a market economy is,” said Zha Daojiong, an international political economy professor at Peking University. “Given the recent experience with stock markets in Shanghai and Shenzhen, there’s a growing feeling we need to be cautious on market reform.”

A strong sign of where China aims to pivot its economy is expected as soon as October with the initial draft of the government’s next five-year plan, due to be completed at the legislature’s annual gathering in March.

In many cases Beijing has sought to adjust the international order rather than adapt to it, such as in creating its own development bank and pushing bilateral currency agreements with trading partners rather than working through multinational groups.

“There’s a disinclination among some to be given a set of rules by the global economic and political system, and this group wants to reshape international rules more in their favor,” said Conference Board economist Andrew Polk. Rather than worry about the IMF, this group will “ensure, pressuring those in Latin America and Asia who buy our exports, that they have the yuan on their balance sheets,’” Mr. Polk added.

Yu Yongding, economist at the Chinese Academy of Social Sciences and a former member of the central banks’ monetary policy committee, played down the economic significance of including the yuan—also known as the renminbi, or RMB—in the IMF’s special drawing rights, or SDR.

“I do not think China should pay too much attention to the question of whether and how the RMB can be included in the SDR,” he said. “It is stupid.”

China’s main domestic stock-market indicator has fallen about 30% since mid-June. In response, the government blocked large shareholders from selling, encouraged government entities to buy, suspended new-share offerings and sent police searching for “malicious” sellers. On Thursday after the IMF decision, the Shanghai Composite Index fell 3.4%.

IMF Managing Director Christine Lagarde and Chinese Premier Li Keqiang meeting in Beijing in March.
IMF Managing Director Christine Lagarde and Chinese Premier Li Keqiang meeting in Beijing in March. Photo: European Pressphoto Agency

China also faces a decision by major global trading nations on whether it will gain market-economy status under the World Trade Organization, which China has sought since it joined the group in 2001. The change would make it more difficult to levy high tariffs on Chinese goods.

Like most countries, China isn’t monolithic, and many parties—most notably at the central bank—favor further economic overhaul, say analysts and officials. Last week the People’s Bank of China unveiled a new system aimed at making the yuan’s value more market-based even as it intervened to slow the currency’s depreciation.

“The currency has been overvalued, so the new system is good,” said Xing Yuqing, research professor at the National University of Singapore and a former Asian Development Bank consultant. “But on current-account liberalization, I bet the government will postpone. When you look at how they handled the stock market, they don’t have the skills to deal with volatility.”

Part of the problem China faces at this stage of liberalization is the growing tension between a state-led system that has misallocated capital for decades and new parts of the economy that are increasingly market-based, analysts said. If money flows into the country too fast, it can overwhelm the system’s ability to handle it, they added.

“It’s a very conflicted picture,” said Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “But there’s never a perfect time for reform. If it doesn’t embrace markets, it won’t unwind the imbalances and could end up like Japan, with a long grind down and never really recovering.”

On Thursday, opinions on Chinese social media appeared to run roughly two-to-one against the IMF’s move. “The IMF can’t be trusted. It’s just a puppet of the U.S.,” wrote news portal iFeng.com, in a commentary that received more than 900 likes.

Wrote a poster on the Weibo social-media service, “The fact that the yuan won’t be admitted into the SDR basket just illustrates the parochialism and rascality of the U.S.”

Write to Mark Magnier at mark.magnier@wsj.com

Related:

.

Greek PM set to announce early elections: state TV

August 20, 2015

.

Greek Prime Minister Alexis Tsipras delivers his speech as he attends a news conference after a meeting at the Greek Ministry of Infrastructure, Transport and Networks in Athens, Greece, August 12, 2015. REUTERS/Christian Hartmann

By George Georgiopoulos

ATHENS (Reuters) – Greek Prime Minister Alexis Tsipras is set to call early elections, state television said on Thursday, in a bid to quell a mounting rebellion in his leftist Syriza party and seal support to implement a tough bailout program.

After days of rumors about what the government would do next, government officials said the previously cited option of a confidence vote had been shelved and the idea of calling snap polls as early as mid-September had become more likely.

Tsipras was huddling with senior advisers on Thursday afternoon to decide his next move, a government official said.

“Everything is possible,” the official told reporters when asked whether Tsipras could announce elections later in the day.

ERT state television said the timing of snap elections would be announced later on Thursday.

Tsipras had been widely expected to call snap polls at some point in the autumn after a bruising seven months in office that saw Greece nearly crash out of the euro zone and shut its banks for three weeks to survive a battle with foreign creditors.

After campaigning against austerity, the 41-year-old leader last month accepted an 86 billion euro bailout package from European and International Monetary Fund creditors tied to tax hikes and spending cuts under the threat of a banking collapse.

But votes in parliament to pass the stringent austerity measures laid bare a revolt by nearly a third of Syriza lawmakers, forcing Tsipras to rely on opposition support and robbing him of a guaranteed parliamentary majority.

With the bailout approved in parliament and the first tranche of aid disbursed – allowing Greece to repay debt to the European Central Bank that fell due on Thursday – Tsipras can now focus on taking on far-left party rebels who have threatened to breakaway.

Energy Minister Panos Skourletis, a close Tsipras adviser, said the split had to be dealt with. “The political landscape must clear up. We need to know whether the government has or does not have a majority,” he told ERT.

(Writing by Deepa Babington, editing by Peter Millership)

China’s stock market: confidence in the ability of the Chinese authorities in question

August 19, 2015

.

By Brendan Clift
South China Morning Post

Heightened volatility took mainland equity investors on a rollercoaster ride on Wednesday as the markets extended the previous day’s dive to a cumulative 9 per cent before rallying to end higher, but left Hong Kong stocks reeling.

Hong Kong shares ended down 1.3 per cent, wiping out all the gains made this year, with the Hang Seng Index closing at its lowest point since December after losing 300 points to end the day at 23,167.85.

The Shanghai Composite Index tumbled to 3,558.38 points mid-morning, its lowest intraday level in more than  two weeks, but an afternoon recovery took it to 3,794.11, a daily gain of 1.23 per cent. Shenzhen followed a similar track.

“I think recent large policy interventions have raised uncertainty, which explains the increased volatility,” said Tim Condon, the head of Asia research at investment bank ING.

Chief among those interventions is stock purchases by the “national team”, a group of financial institutions and regulators backed by the China Securities Finance Corp (CSFC). On Friday, the China Securities Regulatory Commission said the CSFC would intervene to stabilise the markets “for a number of years to come”.

Gerry Alfonso, a director at Shenwan Hongyuan Group in Shanghai, said the sharp uptick on Wednesday was initiated by “national team” purchases, which would continue to be a significant driver of the market.

“The market typically needs a trigger to realise there was an overcorrection, and those CSFC purchases seem to be that trigger. Some companies are disclosing the CSFC positions on their stocks, triggering rallies,” Alfonso said.

Most analysts agreed that the authorities, having talked up a bull market, should take steps to restore stability after July’s crash.

“Government intervention is necessary when there are severe dislocations in the market, particularly in immature markets dominated by retail investors such as the Chinese one,” Alfonso said.

Of the 55 million new individual investor accounts for A-share trading opened between March and July, almost 90 per cent involved less than 100,000 yuan, according to National Australia Bank research.

But attempts to control the country’s equity markets and newly floated currency will be sorely tested by savvy investors and slow global and national economies.

“Beijing will increasingly have to choose between propping up the equity market and defending the currency from further downside pressure. They will not be able to do both,” said analysts at BMI Research.

“Both the local stock market and the currency are significantly overvalued, and the veil of government support for both has been pierced, giving way to free market forces,” the analysts said.

Richard Holden, professor of economics at the University of New South Wales, echoed the International Monetary Fund’s call this month for the government to step back.

“China is learning the hard way that its ‘command and control economy’ doesn’t translate into the share market, which is designed to be free from government intervention,” Holden said.

But others took the view that the current volatility was less disruptive than an unfettered correction.

“China’s market has a history of sell-offs followed by V-shaped rebounds, as is typical in markets that are dominated by retail investors,” said Kieran Calder, head of Asia equities at Coutts Investment Office.

“The biggest risk to further downside would be if market participants completely lost confidence in the ability of the Chinese authorities to put a floor under the market.”

http://www.scmp.com/business/markets/article/1850986/volatility-hits-mainland-china-stocks-hong-kong-left-reeling

Related:

China’s Currency Parity Puzzle — yuan’s value may continue falling — It’s not the exports

August 19, 2015

.

The central bank says a sudden yuan devaluation step was aimed at market reform, but analysts smell different motives
.
By staff reporters Huo Kan, Zhang Yuzhe, Yu Hairong, Wang Liwei and Wang Ling

(Beijing) – Boosting exports, controlling outbound capital flow and supporting the Chinese currency’s bid for Special Drawing Rights (SDR) status are just some of the reasons cited by analysts for the yuan’s unexpected devaluation in mid-August.

The yuan lost about 3 percent of its value against the U.S. dollar between August 11 and 13, roiling global equity markets and stoking fears that China had pushed a trade war button.

Yet according to the People’s Bank of China, the bottom-line reason for the dramatic adjustment – which began with a 2 percent plunge August 11, the biggest one-day exchange rate decline for the yuan in 20 years – was to move the nation’s currency closer to full market control.

A central bank statement released after the first day of devaluation said the adjustment had coincided with the introduction of a new system for determining the so-called central parity rate, which the bank sets daily through its affiliated China Foreign Exchange Trade System. The system, in place since 2005, lets the yuan’s value rise or fall within 2 percent of a bank-set benchmark. The benchmark is based on a basket of major currencies.

Under the latest rate-setting tweak, the bank said, the closing price of the yuan every workday on the spot market would be taken into account when setting the following day’s opening central parity rate. The daily currency values would thus better reflect the market-driven development of yuan-dollar exchange rates, as well as the exchange rates of other major currencies and supply-demand conditions on the global forex market, the bank said.

It was one of the biggest adjustments since July 2005, when the central bank stopped directly setting the daily yuan-dollar exchange rate every day and introduced a rate-setting mechanism based on a basket of foreign currencies and a trading band. Since then, the bank has intermittently widened the band to today’s 2 percent. It was originally 0.3 percent.

The central parity system is designed to reflect market conditions because the rate tracks what happened on the previous day during global forex trading. Yet inconsistencies are not uncommon, said an analyst who asked not to be named, and “over the past decade” the gap between central parity and global market rates has widened.

The central bank called the August 11 devaluation a one-time event tied to that day’s rate-setting system adjustment. It also said the steep decline corrected what had been an ever-widening gap between the central parity rate and the value of the yuan on the global forex market.

Kudos and Questions

The International Monetary Fund (IMF) applauded the bank’s initiative. “The new mechanism for determining the central parity of the (yuan) announced by (China’s central bank) appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” an IMF spokesperson said. “Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets.”

A variety of analysts have also voiced support. Sun Xiaofan, chief economist at Beijing Devega Investment Consulting Co., said the move enhanced the market’s role “more than ever.” And Huang Yiping, an economics professor at Peking University’s National School of Development, praised the bank for “letting market factors play a bigger role, along with the basket of other currencies” in setting the yuan’s value.

Explaining the government’s reasoning was Zhu Baoliang, director of the economic forecast department at the State Information Center (SIC), an agency under the National Development and Reform Commission.

Zhu told Caixin that, as before, the exchange rate’s fluctuations under the new system will be based on a managed float. But only under special circumstances, such as when the stock market slumps or when capital outflows and inflows surge, he said. Thus, from now on short-term capital flows are likely to play a bigger role in setting the exchange rate.

“Intervention measures will be different” than in the past, Zhu said. “They’ll be better coordinated with other countries, using currency swaps, panda bond issues or overseas yuan-bond issues to increase inflows of yuan.”

Breaking rank with the official commentators, though, are analysts who see other motives behind the central bank’s decision.

Some think the government made the yuan cheaper against the dollar to improve the competitiveness of Chinese exports. They point to the fact that the nation’s exports fell 8.9 percent in July from the same month 2014 – a statistic released by the National Statistics Bureau just a few days before the first devaluation. Industrial and investment activity also fell in July.

Throwing cold water on talk of an export-business motive was the central bank’s Deputy Governor Yi Gang. He told reporters at an August 13 press conference that such speculation “is nonsense… There is no need to adjust the rate to boost exports.”

Zhang Bin, director of the Institute of World Economics and Politics of the China Academy of Social Sciences (CASS), said rising labor costs have had a much larger role than exchange rate fluctuations in weakening China’s export sector.

And Zhu said that while devaluations can promote exports of low-end products produced by labor-intensive manufacturers, China’s export businesses in recent years have moved up the technology ladder and now sell more high-end products, which are less sensitive to exchange rate fluctuation.

“The marginal benefit” of yuan depreciation “is declining,” Zhu said. “It may take a couple of years for the effects to show.”

Other analysts say that, given the current global economic slowdown, spurring Chinese exports would require a lot more than a relatively small currency devaluation.

Liang Hong, chief economist at the investment bank China International Capital Corp., said only a much larger, long-term currency depreciation could help Chinese exporters. At the same time, though, a major devaluation would in many ways have a negative impact on the rest of China’s economy.

Other analysts say the central bank adjusted the rate to improve the yuan’s shot at SDR status, which China has sought for years. Currencies designated by the IMF for the SDR – currently the U.S. dollar, yen, euro and pound – can be loaned to sovereign states.

The yuan’s eligibility for SDR is expected to be discussed at an IMF meeting in November.

Responding to questions about a possible connection between the yuan’s devaluation and the SDR decision, an IMF statement said that the central bank’s rate-setting adjustment “has no direct implications for the criteria used in determining the composition of the basket” of SDR currencies. “Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the (yuan) were included in the currency basket going forward.”

Separately, an official close to the IMF’s SDR assessment process told Caixin that China’s bid and the IMF’s decision on the yuan would be affected by how authorities “facilitate exchange rate and interest rate issues.” These would have “a big impact,” the official said.

And a central bank official insisted there’s “no link” between China’s SDR effort and the latest currency rate moves. What will affect the yuan’s bid for the SDR, he said, are China’s economic development and the stability of its financial market.

Another possible force driving the devaluation is the outbound flow of capital from China to other countries. Concerns about capital outflow have been growing since mid-2014 on the back of the government’s declining foreign currency reserves, rising expectations of a weaker yuan, and interest rate hikes in the United States.

Yu Yongding, a former member of the central bank’s monetary policy committee, said a government that wants to curb capital outflow can choose to devalue its currency. That’s because devaluation raises the costs of moving money out of a country, making overseas transfers less attractive.

The central bank’s Yi, however, said there’s been nothing unusual lately about China’s capital outflow. And he said the nation’s foreign exchange reserves have fallen due to a rise in household and private sector forex deposits, increasing overseas investments by Chinese companies and fluctuations in major currency exchange rates worldwide.

Liang agreed, adding that “the market overestimated China’s capital outflow situation.”

Calls for Change

Now that the devaluation has taken effect, central bank Assistant Governor Zhang Xiaohui said the yuan’s value has touched true market levels. For that reason, she said, there is “no basis for persistent and substantial devaluation.”

A source close to the central bank who asked to remain anonymous said governments in most countries around the world have found the 3 percent depreciation acceptable. And the international community doubts China’s move will lead to retaliatory depreciations in other countries or any other sort of exchange rate war.

China’s post-devaluation exchange rate on August 14 was 6.3918 yuan to the dollar, or 2.93 percent lower than the August 10 closing rate. This lower value was consistent with economic fundamentals, Yi said, adding the central bank would no longer regularly intervene to adjust the rate except in cases of extreme forex market volatility.

The central bank between 2011 and August adjusted the central parity rate as needed according to the government’s economic development targets and the foreign currency market. These adjustments were aimed at helping China balance its economy, according to the bank.

Some experts wonder whether the central parity rate system has outlived its usefulness. Zhang Bin said the bank’s system of adjusting the central parity rate every day is an unsustainable mechanism. Every central bank rate intervention, he argued, triggers imbalances in yuan trading on the global forex market.

In late 2012, the yuan’s spot market rate against the dollar surged for more than 10 days even though the central parity rate never wavered. And this year between March and August the forex market’s yuan rate hovered around 6.21 while the central parity rate climbed no higher than 6.11 to the dollar.

The gap between the forex market and central parity rates offer proof that the yuan’s rate is ultimately controlled by the central bank, not the market, said Xu Gao, chief economist at Everbright Securities. Thus any change in the rate is considered an indicator of the central bank’s monetary policy, and thus can have a major impact on global financial markets.

Yu is among the experts calling for an overhaul of the central parity rate system. The longer the government delays such changes, he said, the higher the risk.

Only when the central bank stops intervening in the yuan-dollar exchange rate will a balance be struck between the global forex market and the domestic value of China’s currency, Yu said.

After three days of rate cuts, the value of the yuan on August 14 started to rebound after three days of tension. Qu Hongbin, chief economist for China at HSBC bank, said forex market players had panicked August 11 and 12 because the central bank’s intentions were not clear.

Since then, relative calm has set in. But many investors are still uncertain about the yuan’s short-term direction. One economist at a foreign investment bank told Caixin that many market investors are expecting for more yuan depreciation.

Some investors lost money on the devaluation. A trader at a Hong Kong investment bank said he has many clients who lost about 6 percent of their money parked in derivative products called Targeted-Redemption Forwards, which are tied to yuan-to-dollar exchange rates.

Also losing money, according to Devega’s Sun, are Chinese companies that raised money overseas by issuing U.S. dollar-denominated bonds, some importers, and companies with dollar-based debt.

The yuan’s value may continue falling, although not by much, said Xie Yaxuan, chief economist at China Merchants Securities. He expects the central parity rate to stabilize between 6.3 and 6.5 to the dollar before the end of August.

Over the long term, Peking University’s Huang said, the fundamental health of the Chinese economy will set the pace for the yuan’s value fluctuations – in any direction. “As long as China’s economy is stable,” he said, “a stable yuan or appreciation will be increasingly possible.”

(Rewritten by Han Wei)

http://english.caixin.com/2015-08-18/100841030.html

China gold reserves up more than 19 tonnes in July

August 15, 2015

China gold reserves up more than 19 tonnes in July

China is the world’s largest producer of gold and ranks fifth globally in gold holdings

BEIJING (AFP) – China’s gold reserves rose by more than 19 tonnes in July, the official Xinhua news agency said Saturday, after the central bank last month gave the statistic for the first time in six years.Bullion holdings stood at 1,677.30 tonnes at the end of July, Xinhua said citing the People’s Bank of China (PBoC), a 1.16 percent increase on June’s 1,658 tonnes.

The rise is worth nearly $700 million, according to Friday’s price of $1,118.25 an ounce on the London Bullion Market.

The PBoC issued gold reserve figures last month for the first time since April 2009, revealing a rise of 57 percent over the past six years.

China is the world’s largest producer of the yellow metal, but the increase marked a slowdown in gold accumulation after holdings jumped 75 percent from 2003 to 2009.

China ranks fifth globally in gold holdings, according to Bloomberg News.

The price of gold reached record highs near $1,800 in 2012 at the height of the United States’s bond-buying stimulus programme and the eurozone debt crisis, before falling significantly.

But the yellow metal is considered a safe bet in times of turmoil and uncertainty, and it rose last week after China devalued its yuan currency, raising concerns over the health of the world’s second-largest economy.

Beijing said the move was the result of switching to a more market-oriented method of calculating the daily reference rate which sets the value of the yuan.

China keeps a tight grip on its currency on worries sudden fund outflows or inflows could cause more financial risk and challenge its control, but it has also pledged to move towards more flexibility and is pushing for the yuan to become one of the units that make up the International Monetary Fund’s “special drawing rights” reserve currency.

.

Eurozone Finance Ministers Approve New Bailout For Greece

August 14, 2015

.

Europe: Deal hands Greece another lifeline to stay in the eurozone

Large-scale defections from Syriza party lawmakers during a parliamentary vote on the agreement Friday morning indicate that Prime Minister Alexis Tsipas may soon call new elections.
Large-scale defections from Syriza party lawmakers during a parliamentary vote on the agreement Friday morning indicate that Prime Minister Alexis Tsipas may soon call new elections. PHOTO: EUROPEAN PRESSPHOTO AGENCY
.
By Gabriele in Brussels and Marcus Walker in Athens
The Wall Street Journal
.

The eurozone approved €86 billion ($96 billion) in new bailout loans for Greece on Friday, sending the country another lifeline as it hurtles toward new political uncertainty and a battle between its creditors over how to reduce its hulking debt.

The deal marks an end to more than six months of turbulent negotiations between the left-wing government in Athens and its creditors, the other eurozone countries and the International Monetary Fund, that brought Europe’s currency union closer to break-up than before in its almost-six-year-old debt crisis.

“The past six months have been difficult. They have tested the patience of policy-makers and they have tested the patience of our citizens even more. Together, we have looked into the abyss. But today, I am glad to say that all sides have respected their commitments,” European Commission President Jean-Claude Juncker said.

But the aid deal still faces major obstacles. Large-scale defections from Syriza party lawmakers during a parliamentary vote on the agreement Friday morning indicate that Prime Minister Alexis Tsipas may soon call new elections.

That could once again delay the implementation of the austerity measures mandated by the deal as well as action by the other eurozone countries to lower Greece’s debt load.

At the same time, the steep budget cuts Greece has to implement in return for the new bailout are bound to cause more pain for its economy and citizens. The rescue program foresees a 2.3% contraction of Greece’s gross domestic product this year, followed by a 1.3% decrease next year.

The deal also expects that shareholders, junior creditors and senior bondholders in Greece’s battered banks will take losses before the lenders will be recapitalized. That will likely cause further uncertainty for a financial sector already reeling from capital controls that are unlikely to be lifted anytime soon.

“In the end how good this deal is, depends on how Greek society, the Greek state, the Greek economy, how social actors, and economic actors respond to it,” said Greek Finance Minister Euclid Tsakalotos. “Any deal is only as good as what you make of it”

To seal the deal, Greece’s third in just more than five years, its creditors first had to sort through some internal struggles, especially over the role of the International Monetary Fund.

The IMF has long held a more pessimistic view on Greece’s economy and questioned its ability to repay its debts. That is why the fund has refused to commit to new loans for Greece until other eurozone governments have taken measures to reduce that burden, expected to reach more than 200% of GDP in the coming years.

Eurozone governments, led by powerful Germany, have made the participation of the IMF a precondition for their own loans but don’t want to take such steps, including giving Greece more time to pay back loans and interest, until the fall.

To straddle that difference, the IMF and eurozone finance ministers issued statements Friday, each seemingly trying to approach the others’ expectations as far as possible.

“We look forward to working closely with Greece and its European partners in the coming months to put in place all the elements needed for me to recommend to the Fund’s Executive Board to consider further financial support for Greece,” Christine Lagarde, the IMF’s managing director, said.

Meantime, the eurozone finance ministers said: “The Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and repayment periods) aiming at ensuring that Greece’s gross financing needs remain at a sustainable level.”

But in her statement, Ms. Lagarde also warned that Greece will need “significant debt relief, well beyond what has been considered so far.”

Further hurdles to the bailout running smoothly could be set up by snap elections in Greece. Elections this fall are not certain, but government officials are privately hinting at them and many analysts expect them, because Mr. Tsipras has no stable governing majority in parliament to implement the bailout. Elections could bolster or derail Greece’s bailout, depending on their outcome.

Of the 149 lawmakers in Mr. Tsipras’s Syriza party, 49 have withheld support for the premier in at least one of the three parliamentary votes on bailout measures since Mr. Tsipras agreed with European leaders July 13 to arrange a new financial rescue.

Opposition parties that have helped the government pass the measures despite Syriza’s disarray warned Friday that Mr. Tsipras can’t assume their continued support.

If Mr. Tsipras can win a new majority with a new-look Syriza that is loyal to him and purged of antibailout dissidenters, it could ease the passage of the austerity measures and market-oriented economic overhauls that creditors want.

German Finance Minister Wolfgang Schäuble, a harsh critic of the new bailout deal, said he was encouraged that the new program had the support of opposition parties. “I believe this is an opportunity,” Mr. Schaeüble said

But it is also possible that a new antibailout movement, comprising Syriza’s antibailout faction and possibly other left-wing forces, could win many votes —denting support for the bulk of Syriza that has stayed loyal to Mr. Tsipras and forcing him to seek a broader, and possibly less stable, new governing coalition.

Beyond a possible election, the experience of Greece’s bailouts since 2010 is that enacting tough austerity has eroded public and parliamentary support for every government that tried to comply with creditors’ will. It would be a surprise if the antiausterity Syriza movement proves more stable under the pressure of the difficult bailout effort than previous governments.

National parliaments in some eurozone countries also still need to approve the deal. Mr. Schaeüble said he expected a vote in the Germany parliament Tuesday or Wednesday and that he has already briefed leading lawmakers on the decisions.

Corrections & Amplifications:
Wolfgang Schäuble is Germany’s finance minister. In an earlier version of this article his surname was misspelled.

Write to Gabriele Steinhauser at gabriele.steinhauser@wsj.com

http://www.wsj.com/articles/eurozone-finance-ministers-approve-new-bailout-for-greece-1439581138

China’s devaluation — A move that deserves our praise

August 13, 2015

By William Pesek
Bloomberg

China’s surprise devaluation is sure to stir up fear and loathing among the world’s economic populists. (Keep your eyes on Donald Trump’s Twitter account.) But the move deserves praise, not condemnation. It might even prove a boon for world growth.
.
Beijing spent much of the last year propping up the yuan to combat capital outflows, avoid debt defaults and win a place among the International Monetary Fund’s five reserve currencies. But with growth sputtering and deflation looming, China has now reversed course, cutting its daily reference rate yesterday by 1.9 percent, the most in two decades. The Chinese government has effectively admitted that risks are accelerating in the world’s second-biggest economy.
.
.
Politicians in the U.S. are sure to call the devaluation a threat to American jobs, and politicians in Japan will bemoan its effects on their deflation fight. But it’s important to keep a sense of perspective. China has called this a one-time fix designed to push the yuan toward a more market-determined system, in accordance with the IMF’s wishes. Besides, if China were going all-in on a beggar-thy-neighbor policy, its devaluation would have been far more substantial — and even then, there’s no guarantee it would have succeeded at propping up the economy. The yen’s 35 percent plunge since late 2012 is hardly reviving Japan, any more than this year’s 10 percent currency drop is saving Australia. (And let’s be honest about the hypocrisy at work: nobody gave Tokyo or Canberra grief for their dramatic currency drops.)
.
It’s also important to acknowledge that Beijing’s new policy poses risks for China. The weaker yuan increases the odds of a surge in defaults on foreign-currency debt, which makes the country highly vulnerable to capital flight. In April, Shenzhen-based Kaisa became the first Chinese developer to renege on such debts. The People’s Bank of China is aware a lower yuan could push others to the brink, which is why it probably won’t allow the currency to fall too much farther.
.
The real question isn’t whether Beijing should have devalued the yuan, but what it does with the time this maneuver buys. Given how little tolerance President Xi Jinping and Premier Li Keqiang have shown for the shock therapy China needs to wean itself off excessive investment and exports, it would be reasonable to assume the currency move is a tactic to delay reforms and re-inflate the country’s stock bubble. If the government unveils new policies to prop up stocks — thus giving the impression the devaluation was essentially a stock market intervention — then it could reignite the global currency war.
.
But there’s a more optimistic view: Beijing might be buying some stability so it can accelerate the reform process. From that perspective, this week’s news that China is preparing to tackle its state-owned-enterprise problem looks even more promising. According to the South China Morning Post, China is creating two new kinds of companies to supervise and regulate state-owned behemoths. The scheme is modeled after Singapore’s state-owned investment arm Temasek and, if handled well, it has the potential to alter the foundations of Asia’s biggest economy for the better.
.
These politically-coddled monopolies are at the nexus of all of Beijing’s worst excesses — debt, overcapacity, corruption, pollution. Reducing their influence would be a vital first step for cultivating the sort of startup boom that China needs.
.
But it won’t be easy. Kickbacks from land grabs, insider trading and old-school rent seeking have minted countless millionaires among Xi’s Community Party comrades. These vested interests will battle Xi’s every effort to make SOEs more open, competitive and conventionally profitable.
.
Taking on this fight would be easier for Xi if China’s exports weren’t falling (they dropped by 8.3 percent in July) and deflation didn’t loom as a threat. That’s where Tuesday’s devaluation, and the expected boost to exports, come in. It’s plausible that SOE reform motivated the Chinese government’s devaluation decision.
.
If Xi is truly interested in allowing the market to play a leading role in economic decision making, the real test will be whether his government shows the courage to open the country’s opaque financial system, tighten corporate governance and allow the media to play a bigger role in weeding out corruption. Rather than bellyaching about the latest currency move, these are the steps China critics should be watching for. Personally, I can’t help but feel optimistic that China’s yuan-regime change suggests they’re coming.
.
William Pesek is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.
The opinion expressed is his.

Follow

Get every new post delivered to your Inbox.

Join 1,122 other followers