China opens new front in war as yuan speculation distorts export data

Wed May 8, 2013 6:49am EDT
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By Pete Sweeney

SHANGHAI (Reuters) - China's central bank signaled on Wednesday it was prepared to change its monetary strategy to fend off inflows of speculative capital, as Beijing struggles to control a tide of cash washing in from overseas markets.

The move came as April exports blew past expectations, which appeared on the surface to indicate that both China's economy and global demand were on the mend. But economists were quick to suspect the figures were artificially inflated by investors who were disguising speculative bets on the yuan currency as trade payments.

Faced with the risk that such inflows could cause the yuan to appreciate so quickly that it destabilizes exports and the broader economy, the People's Bank of China (PBOC) has begun intervening heavily in the domestic currency market this year, buying up dollars and selling yuan.

This leaves the question of how to keep the yuan it has sold from distorting domestic markets.

On Wednesday morning, during a routine call to primary dealers in China's interbank market, dealers told Reuters that regulators had queried them for demand for three-month bills.

Hours later, after markets had closed, the PBOC said it would auction 10 billion yuan ($1.6 billion) of three-month bills on Thursday.

While a relatively small amount, the central bank has not issued bills - which drain liquidity in tenors between three months and three years - since 2011. It has instead relied on short-tenor bond repurchase agreements to move money rapidly in and out of the market, much as central banks in developed economies do.

The move suggests that the PBOC is preparing to make systematic longer-term cash drains from the money supply to blunt the impact of hot money flows, with a potential knock-on impact on interest rates, market sentiment and economic growth.   Continued...

A truck is loaded with a shipping container at a port in Nantong, Jiangsu province May 5, 2013. REUTERS/China Daily