Analysis: Yuan speculators muddle China's exports, complicating reform

Fri Apr 12, 2013 3:01am EDT
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By Pete Sweeney

SHANGHAI (Reuters) - Companies gambling on yuan appreciation are distorting Chinese trade statistics, creating a monetary policy headache for Beijing officials and complicating government plans to liberalize the capital account.

Speculative inflows disguised as trade are causing concern because they aggravate a recent trend - the sudden resurgence of hot money inflows. Some $125 billion poured into China in January and February after nine consecutive months of outflows, exclusive of hot money masquerading as trade.

Companies that cannot legally move money into the country for the purpose of currency speculation often try to circumvent China's capital controls by overstating trade invoices, thereby disguising investment funds as payments for goods and services sold overseas, according to economists.

These firms are betting on an extended rally of China's currency, which has gained more than 3 percent against the dollar since the third quarter of 2012 to hit a record high on Friday morning. Now that is even distorting trade data.

To keep the exchange rate from appreciating too quickly in the face of such bullishness, the People's Bank of China (PBOC) has stepped up its meddling in the domestic forex market, despite repeated public promises from regulators to stay on the sidelines.

This intervention has caused Chinese foreign exchange reserves to rise by over $128 billion in the first quarter of 2013, compared with $130 billion for all of 2012, by extension pouring a tide of yuan into China's interbank market and applying downward pressure to short-term interest rates.

The central bank, aiming to keep rates under control, has been forced to adapt the way it manages liquidity, which has rattled the country's equity and money markets.

"If this trend is sustained, it complicates monetary policy; it adds liquidity to the economy which then inflates money and credit growth and property," said Robert Subbaraman, economist at Nomura in Hong Kong.   Continued...

A bank clerk counts Chinese yuan banknotes at a branch of the Industrial and Commercial Bank of China in Huaibei, Anhui province in this June 8, 2012. REUTERS/Stringer/Files