Something looks to be stirring in China – the country’s currency fell for a sixth day in a row yesterday, falling by the largest amount seen in 22 months.
And, spot iron ore prices dipped under $US120 a tonne for the first time in eight months.
The two developments are unrelated, but they do suggest that all is not what it seems in China.
In fact the currency moves seem to be the start of a policy change designed to inject more risk into trading in foreign exchange involving the yuan – rather than the apparent one way bet (of a rising yuan).
Market analysts reckon the Chinese government is attempting to send a message to speculators (many of whom are Chinese companies, banks etc) that the days of easy gains from betting that the yuan will go on rising – as it has basically done since it was allowed to start moving back in 2005.
An article was published on the official Xinhua website on Monday of the excessive liquidity caused by cross-border carry trade investment and excessive capital inflows. It is now thought this article has summarised some of the official concerns about what is now going on with the Chinese currency.
The yuan fell 0.25% yesterday to 6.1135 per dollar in Shanghai, according to China Foreign Exchange Trade System prices. It is now down 0.7% in the past week, a big move for the Chinese currency which is not subject to market influences.
The onshore and offshore versions of the currency are now both at their lowest levels against the US dollar since last November. The onshore currency can move 1% either way, the offshore currency can trade freely.
What makes the fall even more astonishing is that the currency hit record highs against the greenback in late January. So to go from that high, to a five month low in several days of price fixing by the central bank, is astonishing given the lack of market influence.
Newsagencies reported that the spot rate was 0.1% above than the central bank’s reference rate, which was raised 0.01% (one basis point) to 6.1184 yesterday. The currency is allowed to diverge a maximum 1% from the daily fixing.
Bloomberg report that the yuan has strengthened in all but three quarters since a dollar peg ended in July 2005 and its up 35% against the US dollar in that time.
Swiss bank, UBS told clients the yuan’s recent depreciation could suggest the PBOC (the Chinese central bank) is shifting away from allowing a steady pace of gains and this may lead to a reversal of “hot money” inflows.
And according Bloomberg, “The PBOC is engineering the yuan declines which might mean the central bank wishes to change the perception of the one-way bet on yuan gains,” said Kenix Lai, a Hong Kong-based currency analyst at Bank of East Asia Ltd. “It also looks like the PBOC is introducing two-way volatility as it prepares for a wider trading band.” Bloomberg reported.
And that widening of the band thought has other supporters. JPMorgan Chase & Co. economists led by Zhu Haibin say China may double the yuan’s trading band to 2 percent in two to three months.
They added that falls like we have seen for the past six days will likely be moderate and temporary.
The Financial Times reported that some analysts reckon the PBOC is trying to introduce more risk into currency trading involving the yuan.
They, and other analysts point out that the Chinese government closely guides the value of the currency, so six successive days of declines has had to have official support, especially the big fall yesterday. They say there could be a larger than expected rise in the next couple of days just to make markets more volatile.
The FT quoted Deutsche Bank analysts as saying they believed the PBOC is introducing "two-way volatility" to help "increase the flexibility of the exchange rate".
In fact the PBOC last week revealed it had plans to expand the yuan’s trading band in an “orderly” manner this year. That was the first time the central bank gave such a specific timeframe for the proposed change.
The fall in iron ore prices seems more straight forward – weak support from Chinese buyers which allowed the price to dip to $US119.90 a tonne (not ‘plunge’ as some local reports suggested in Australia)
Iron ore prices were around $US124 a tonne early last week when BHP Billiton reported its solid first half price, but warned that the iron ore market was facing an oversupply of ore.
World iron ore spot prices are down 10% so far this year.
The timing of the New Year holiday from the last day of January into the first week of February has disrupted supply and demand (iron ore imports hit a record 86.84 million tonnes as steel mills bought early to cover the virtual shutdown for a week over the holiday.
That would mean around 15 to 17 million tonnes of iron ore would not be processed in that time.
The ANZ Bank says reports from China suggest there’s continuing attempts to cut production of steel from old, highly polluting plants in some provinces, while other provinces have tightened the rules on buying property or investing in some types of investment, which could help finance imports or property deals.
Iron ore stockpiles in China hit 100 million tonnes last week – they have been up to 20 million tonnes or more lower in the past six to nine months.
The news of the slide under $US120 a tonne saw the prices of BHP, Fortescue and Rio Tinto all dip yesterday, helping in turn to drag down the wider market.
