China underlines reform push with record yuan despite weak exports


By Pete Sweeney

SHANGHAI, Oct 14 (Reuters) - China's central bank appears tohave underlined its commitment to currency reform by allowingthe yuan to set record highs against the dollar despite signs ofunexpected weakness in exports.

The yuan hit a second consecutive record intradayhigh of 6.1011 on Tuesday, after the People's Bank of China setits mid-point - the centre of the currency's 2percent daily trading band - at an all-time peak the previousday.

The currency moves came hot on the heels of official datashowing Chinese exports slid in September by 0.3 percent from ayear earlier.

The export figures confounded expectations for a 6 percentrise and marked the worst performance in three months.

A stronger yuan is a key goal for policymakers trying towean the economy off a heavy emphasis on exports more towardsconsumption-led growth.

But they face complaints from Chinese exporters that theyuan's enduring strength is putting their products at adisadvantage in overseas markets even as foreign demand remainstepid.

The yuan is up around 2 percent in 2013, in marked contrastto slides posted by other Asian currencies, and more than 35percent higher since a revaluation in 2005.

"Domestic businesses hope there won't be more rises for theyuan, because exports are still really weak. If the yuan keepsrising, the results could be really ugly," said a currencytrader at a European bank in Shanghai.

In addition, the unexpected weakness in September's exportsraised fresh concerns that economic growth - which has fallen innine of the last 10 quarters - could stumble once again just asit has shown signs of picking up.

A similar surprise dip in exports occurred in June andanalysts said at the time that the yuan's strength was partly toblame.

Some economists predicted the central bank would be forcedto let the yuan slip back, at least symbolically. Instead, itheld a firm line.

The currency has also risen in trade-weighted terms everymonth since Sept 2012 until finally declining slightly inAugust, data from the Bank for International Settlements (BIS)shows. BIS data for September should be released later thisweek.


The spot yuan market has been tightly range-bound sincemid-August. The exchange rate has been mostly steady withminimal intraday volatility, so the recent breakout has startledmarket participants.

"I must say I find it really strange," said a forex dealersat a joint-stock bank in Shanghai. "Fundamentally there's nomajor factor to push up the yuan. Maybe Big Brother (the PBOC)has stopped interfering, and so the dollar is sliding. We'llhave to wait for the afternoon to see if this is sustained."

Traders attributed the market's previous torpor to regulardollar-buying by major state-owned banks, which effectively heldback the yuan from appreciating, and many speculated that thiswas conducted on secret behest of the central bank in order tohold the spot rate flat even while it raised the midpoint.

Some suggested the government was setting the stage foranother widening of the official daily trading band - currently1 percent either side of the midpoint - to allow more two-waymovement in the rate, increasing risk and by extensiondiscouraging further aggressive speculation in the currency byChinese corporations.

However, the yuan broke out of its range-bound cocoon onMonday, moving 1.15 basis points, or 0.015 yuan, in relativelyhigh trading volumes over the course of the day to mark thewidest intraday range since Aug. 19.


Despite exporters' complaints Beijing's reformers see astronger yuan as key to moving China to an economic modelfocused on producing higher-quality goods for domesticconsumption, instead of churning out low-grade exports competingonly on price.

A stronger Chinese currency would also discountdollar-denominated energy imports, make it cheaper to acquireoverseas companies, and reduce the need for Beijing to maintainmassive dollar reserves - the result of years of marketintervention to rein in the pace of the yuan's appreciation.

This last policy has come under increasing criticism insideChina as the dollar index, which measures the currencyagainst major counterparties, has lost ground and Chineseconfidence in the U.S. political ability to meet its outstandingdebt obligations has been shaken by repeated budget impasses.

A strong yuan is also seen as beneficial for another keyproject: to increase the usage of China's currency ininternational trade and in so doing reduce currency transactionrisk for Chinese firms and further diminish China's need tohoard dollars.

Still, China's economic restructuring is far from complete -in fact, economic data so far has shown little evidence ofchange in the underlying drivers of growth - and export-focusedbusinesses remain major employers.

Part of the reason for the central bank's apparentindifference to the trade data is that the exports fall from ayear earlier may not be indicative of a major economic problem.

Exports actually rose from the month earlier and Louis Kuijsand Tiffany Qiu, economists at Royal Bank of Scotland, cautionedthat speculative hot money inflows disguised as trade haddistorted the year earlier figures.

These inflows artificially inflated export figures beginningin late 2012 and early 2013, creating an inaccurately high basisfor comparison.

"The underlying picture is not as bad as the headline datasuggest," they wrote, estimating September's exports actuallyrose 1.7 percent compared with a year earlier once thedistortions are subtracted.

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