Tags: china | yuan | currency

HSBC’s Fung: China to Slow Yuan Rise, Boost Volatility

Thursday, 15 March 2012 05:56 PM

China will slow the pace of the yuan’s appreciation even as it steps up efforts to promote the currency’s use in international markets, says Anita Fung, HSBC Holdings Plc’s chief executive officer for Hong Kong.

Yuan appreciation will “take a moderate pace,” Fung said at an event in New York. “There will be two-way flexibility. The internationalization of the renminbi remains on course,” she said, referring to the alternative name of the yuan.

The People’s Bank of China set its daily fixing for the yuan at the lowest level since December yesterday, after allowing the currency to gain 31 percent since 2005. Premier Wen Jiabao said March 14 that the yuan may be near “equilibrium” and policy makers will allow greater exchange-rate volatility.

“Currency policy is more cyclical and less structural,” Fung said.

The yuan has lost 0.5 percent against the dollar this year to 6.329, after gaining an average 4.3 percent annually over the past six years. Twelve-month non-deliverable forwards traded at 6.33 yuan yesterday, indicating traders expect the currency to be little changed for the period, according to data compiled by Bloomberg.

Central bank Governor Zhou Xiaochuan said March 12 that market supply and demand is playing a bigger role in determining the exchange rate. The surplus in China’s current account, the broadest measure of trade and services, probably narrowed to 3 percent of gross domestic product in 2011, from more than 10 percent in 2007, the State Administration of Foreign Exchange said in a statement last month.

Shifting Focus

Policy markers’ focus has shifted from managing currency appreciation to promoting the yuan’s use in trade settlement and fostering markets for yuan-denominated bonds, loans and stocks in Hong Kong, HSBC’s Fung said.

Tempering currency expectations will aid the development of Hong Kong’s market for yuan-denominated bonds, called Dim Sum bonds, because investors will use them less as proxies to speculate on the yuan, said Benjamin Rudd, head of overseas investment at Ping An of China Asset Management Hong Kong Co.

Sales of the Dim Sum bonds fell 13 percent in the second half of 2011 from the first six months of the year, according to data compiled by Bloomberg, as the European debt crisis pared demand for yuan-denominated investment vehicles.

“What we saw in the third quarter is a massive shakeout, which is very positive for the development of the offshore bond market,” Rudd said. The Dim Sum market has become “a proper credit market,” he said.

Issuance of Dim Sum bonds will increase to 250 billion yuan ($40 billion) this year, Rudd said. Sales totaled 151 billion yuan in 2011, according to data compiled by Bloomberg.

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Thursday, 15 March 2012 05:56 PM
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