Bloomberg News

Yuan Volatility Jumps on Currency’s Trading Band Outlook: China Overnight

March 05, 2012

One hundred-yuan Chinese banknotes pass through a currency counting machine in an arranged photograph at the Hang Seng Bank Ltd. headquarters in Hong Kong on Feb. 22, 2011. Photographer: Jerome Favre/Bloomberg

One hundred-yuan Chinese banknotes pass through a currency counting machine in an arranged photograph at the Hang Seng Bank Ltd. headquarters in Hong Kong on Feb. 22, 2011. Photographer: Jerome Favre/Bloomberg

Bets on swings in the yuan surged as policy makers signaled they may allow greater flexibility in the Chinese currency after it surged 31 percent since 2005.

Implied volatility on one-month options for the yuan versus the dollar rose 11 basis points, the most since December, to 1.88 percent in New York trading after Xinhua News Agency cited People’s Bank of China Governor Zhou Xiaochuan saying the nation may “appropriately” widen the currency’s trading band. The Bloomberg China-US 55 index of the most-traded Chinese stocks in the U.S. slid 1.9 percent after Premier Wen Jiabao reduced China’s economic growth goal to 7.5 percent for 2012, from 8 percent over the past seven years.

The central bank’s aim to loosen limits on currency moves and the growth-target change may discourage speculative bets on yuan appreciation, according to Standard Chartered Plc, one of the five most accurate forecasters for Asian currencies in the six quarters through December, according to Bloomberg Rankings. The implied volatility, a reflection of traders’ expectations of yuan swings in the next month, rose to the highest since Feb. 7.

“A broader trading band does raise the prospect of greater volatility,” said Mike Moran, a currency strategist in New York at Standard Chartered, which forecasts a 1.6 percent advance in the yuan this year and was ranked as the fifth-most accurate forecaster by Bloomberg Rankings. “Uncertainty of the growth trajectory has tempered the more bullish positioning in the yuan.”

Central Parity

The Chinese yuan, also called the renminbi or RMB, has appreciated against the dollar every year since 2005 when the government abandoned a peg to the greenback. The yuan fell 0.04 percent to 6.3095 per dollar as of 11:17 a.m. in Shanghai and earlier reached 6.3189, the weakest level in five weeks. The central bank weakened the yuan’s daily fixing for a second day, by setting it 0.03 percent lower at 6.3141.

“Investors were a bit surprised by China’s cut in the growth target and that damped optimism surrounding the global economic recovery,” said Stella Lee, president of Success Futures & Foreign Exchange Ltd. in Hong Kong. “Zhou’s comments on flexibility don’t signal any near-term yuan movement but concern the long-term exchange-rate reform.”

The People’s Bank announces a central parity for the yuan versus nine currencies including the dollar each trading day and then allows it to strengthen or weaken by 0.5 percent from the rate. The practice has drawn criticism from the U.S., which says Beijing keeps the yuan artificially weak, hurting American manufacturers.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., sank 2.7 percent to $39.17 yesterday in New York, the lowest level since Feb. 10. The Standard & Poor’s 500 Index (SPX) declined 0.4 percent to 1,364.33, after rallying for the past three weeks, as orders to American factories decreased for the first time in three months.

‘Negative News’

China Life Insurance Co. (LFC), the nation’s largest insurer, sank 5.8 percent, the most since Nov. 16, to $43.99 in New York, while online games operator Changyou.com Ltd. (CYOU) tumbled 7.6 percent to a one-month low of $25.35. The Bloomberg China-US 55 Index (CH55BN) slid to 106.57, the weakest level in almost three weeks and trimming its gain this year to 11 percent.

“Any lower than expected growth rate from China may initially be welcomed as somewhat negative news for world growth,” Joe Davis, the Valley Forge, Pennsylvania-based chief economist and head of investment strategy at Vanguard Group Inc., said by phone yesterday. “If you look at China as well as other emerging markets, the valuations are pretty supportive of decent long-run equity returns.”

The Bloomberg China-US 55 measure trades at 19 times analysts’ estimates for member company earnings, data compiled by Bloomberg show. The MSCI Emerging Markets Index is trading at 11 times estimated 12-month earnings, compared with a multiple of 13 for the MSCI World Index (MXWO) for equities in developed markets.

‘Greater Floating’

The central bank last expanded the yuan’s trading band against the dollar from 0.3 percent to 0.5 percent in May 2007. An official at the press office, who didn’t identify himself, picked up Bloomberg’s call today and asked Bloomberg to send in questions by fax. The office has yet responded to Bloomberg questions.

“The RMB exchange rate has gradually met the requirements for greater floating,” Zhou told Xinhua in an interview at China’s annual parliamentary session. “The PBOC is considering that the yuan’s daily floating band could be increased.”

The comments signal that policy makers may reduce dollar purchases that limit gains in the currency because it is now closer to an equilibrium level determined by the current-account balance, said Jeremy Brewin, who oversees about $4 billion of emerging-market debt at Aviva Investors in London.

“They won’t intervene much to support or weaken the currency if there’s normal trading,” Brewin said by phone. “It’s a healthy development.”

Buying Dollars

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, the State Administration of Foreign Exchange said in a statement last month. The surplus will shrink further to 2 percent of GDP next year, from more than 10 percent in 2007, according to the median forecast of six economists surveyed by Bloomberg.

The central bank has been buying dollars to slow the yuan’s appreciation and reduce costs and exchange-rate volatility for Chinese exporters. The practice has seen foreign-currency reserves jump four-fold to $3.2 trillion since the end of 2005.

President Barack Obama’s administration has pressed China to accelerate the yuan’s appreciation as it seeks to boost exports and lower unemployment. The Senate last year approved a bill that would let U.S. companies seek tariffs to compensate for China’s undervalued yuan. The legislation has stalled in the House of Representatives.

One-Way Bets

A wider trading band will boost volatility in currency trading and help deter speculators from betting on continuous currency appreciation, according to Nick Chamie, the head of emerging markets at RBC Capital Markets in Toronto.

“To allow the currency to trade in a wider range would increase the risk of people putting on one-way currency appreciation bets,” Chamie said in a phone interview.

Premier Wen, 69, also told the country’s top legislature yesterday that China will improve the mechanism for setting the exchange rate, make the currency regime more “flexible,” and keep the yuan “basically stable at an appropriate and balanced” level.

“Slower growth in China is good; you can’t have an economy that size growing at a 10 percent clip in perpetuity,” Jonathan Neill, who helps manage $250 million at FPP Asset Management LLP in London, said by e-mail. “As for the currency, we estimate it has appreciated by almost 50 percent in real terms since 1997 so there is no need for any revaluation, quite the contrary in fact; you could make an argument for a lower exchange rate versus the U.S. dollar.”

Yuan NDFs

Twelve-month non-deliverable yuan forwards slipped 0.12 percent to 6.2990 per dollar, indicating traders are betting that the currency will appreciate about 0.2 percent over the next year, according to data compiled by Bloomberg. The yuan will strengthen to 5.92 per dollar by the end of 2013, according to the median of 21 analysts’ estimates compiled by Bloomberg.

China will adopt a gradual approach to currency reform as the nation seeks to keep economic growth stable amid a shrinking global export market, said Win Thin, global head of emerging- markets strategy at Brown Brothers Harriman & Co. in New York

“It will be a very gradual move, especially in the current environment,” Thin said. “I wouldn’t expect anything imminent.”

China Life Discount

The Shanghai Composite Index (SHCOMP) slid 1.2 percent, the biggest drop since Feb. 7, to 2,418.478 today. The Hang Seng China Enterprises Index fell 1.8 percent to 11,261.82, extending this week’s loss to 4.1 percent.

Beijing-based China Life’s American depositary receipts, each representing 15 common shares, traded 1 percent below the company’s stock in Hong Kong, which declined 4.4 percent to HK$23, the equivalent of $2.96 per share. The discount was the biggest since Feb. 22. China Life’s Shanghai-traded stock slid 2.7 percent to 18.33 yuan yesterday, the equivalent of $2.91 per share.

Yanzhou Coal Mining Co. (YZC), the nation’s fourth-biggest producer of the fuel, slumped 4.5 percent to a seven-week low of $23.37 in New York.

The company’s board approved a plan to sell as much as $1 billion of dollar-denominated bonds abroad through an offshore unit, according to a filing to the Hong Kong Stock Exchange yesterday after trading closed in the city.

The Chinese government is scheduled to report inflation data for February on March 9. Consumer prices probably rose 3.4 percent from a year earlier, from 4.5 percent in January, according to the median estimate of 31 economists in a Bloomberg survey. Wen set an annual inflation target of 4 percent for 2012 in his report yesterday.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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