By Pete Sweeney
SHANGHAI Oct 14 China's central bank appears to
have underlined its commitment to currency reform by allowing
the yuan to set record highs against the dollar despite signs of
unexpected weakness in exports.
The yuan hit a second consecutive record intraday
high of 6.1011 on Tuesday, after the People's Bank of China set
its mid-point - the centre of the currency's 2
percent daily trading band - at an all-time peak the previous
The currency moves came hot on the heels of official data
showing Chinese exports slid in September by 0.3 percent from a
The export figures confounded expectations for a 6 percent
rise and marked the worst performance in three months.
A stronger yuan is a key goal for policymakers trying to
wean the economy off a heavy emphasis on exports more towards
But they face complaints from Chinese exporters that the
yuan's enduring strength is putting their products at a
disadvantage in overseas markets even as foreign demand remains
The yuan is up around 2 percent in 2013, in marked contrast
to slides posted by other Asian currencies, and more than 35
percent higher since a revaluation in 2005.
"Domestic businesses hope there won't be more rises for the
yuan, because exports are still really weak. If the yuan keeps
rising, the results could be really ugly," said a currency
trader at a European bank in Shanghai.
In addition, the unexpected weakness in September's exports
raised fresh concerns that economic growth - which has fallen in
nine of the last 10 quarters - could stumble once again just as
it has shown signs of picking up.
A similar surprise dip in exports occurred in June and
analysts said at the time that the yuan's strength was partly to
Some economists predicted the central bank would be forced
to let the yuan slip back, at least symbolically. Instead, it
held a firm line.
The currency has also risen in trade-weighted terms every
month since Sept 2012 until finally declining slightly in
August, data from the Bank for International Settlements (BIS)
shows. BIS data for September should be released later this
ARE THE BULLS BACK?
The spot yuan market has been tightly range-bound since
mid-August. The exchange rate has been mostly steady with
minimal intraday volatility, so the recent breakout has startled
"I must say I find it really strange," said a forex dealers
at a joint-stock bank in Shanghai. "Fundamentally there's no
major factor to push up the yuan. Maybe Big Brother (the PBOC)
has stopped interfering, and so the dollar is sliding. We'll
have to wait for the afternoon to see if this is sustained."
Traders attributed the market's previous torpor to regular
dollar-buying by major state-owned banks, which effectively held
back the yuan from appreciating, and many speculated that this
was conducted on secret behest of the central bank in order to
hold the spot rate flat even while it raised the midpoint.
Some suggested the government was setting the stage for
another widening of the official daily trading band - currently
1 percent either side of the midpoint - to allow more two-way
movement in the rate, increasing risk and by extension
discouraging further aggressive speculation in the currency by
However, the yuan broke out of its range-bound cocoon on
Monday, moving 1.15 basis points, or 0.015 yuan, in relatively
high trading volumes over the course of the day to mark the
widest intraday range since Aug. 19.
NEED FOR STABILITY
Despite exporters' complaints Beijing's reformers see a
stronger yuan as key to moving China to an economic model
focused on producing higher-quality goods for domestic
consumption, instead of churning out low-grade exports competing
only on price.
A stronger Chinese currency would also discount
dollar-denominated energy imports, make it cheaper to acquire
overseas companies, and reduce the need for Beijing to maintain
massive dollar reserves - the result of years of market
intervention to rein in the pace of the yuan's appreciation.
This last policy has come under increasing criticism inside
China as the dollar index, which measures the currency
against major counterparties, has lost ground and Chinese
confidence in the U.S. political ability to meet its outstanding
debt obligations has been shaken by repeated budget impasses.
A strong yuan is also seen as beneficial for another key
project: to increase the usage of China's currency in
international trade and in so doing reduce currency transaction
risk for Chinese firms and further diminish China's need to
Still, China's economic restructuring is far from complete -
in fact, economic data so far has shown little evidence of
change in the underlying drivers of growth - and export-focused
businesses remain major employers.
Part of the reason for the central bank's apparent
indifference to the trade data is that the exports fall from a
year earlier may not be indicative of a major economic problem.
Exports actually rose from the month earlier and Louis Kuijs
and Tiffany Qiu, economists at Royal Bank of Scotland, cautioned
that speculative hot money inflows disguised as trade had
distorted the year earlier figures.
These inflows artificially inflated export figures beginning
in late 2012 and early 2013, creating an inaccurately high basis
"The underlying picture is not as bad as the headline data
suggest," they wrote, estimating September's exports actually
rose 1.7 percent compared with a year earlier once the
distortions are subtracted.