Yuan Gets Early Warning on IMF Ambition as MSCI Defers on Stocks

(Bloomberg) China’s efforts to obtain reserve status for the yuan received an early warning, with a compiler of equity indexes saying the nation needs more policy changes before its shares can be added to an emerging-market benchmark.

New York-based MSCI Inc. deferred a decision on including yuan-denominated stocks, citing investor concerns such as accessibility and capital mobility. Chinese officials have called for the International Monetary Fund to include the yuan in its basket of reserve currencies in a review in October.

“The MSCI deferral is definitely a push for China to accelerate capital-market reforms,” said Banny Lam, co-head of research at Agricultural Bank of China International Securities Co. in Hong Kong. “Restrictions on fund flows must be eased.”

The onshore yuan was little changed at 6.2063 a dollar as of 10:16 a.m. in Shanghai, China Foreign Exchange Trade System prices show. Its gap with the central bank reference rate of 6.1173 was 1.5 percent, within the 2 percent daily limit. In offshore trading in Hong Kong, which is free from the mainland’s capital controls, the currency rose 0.03 percent to 6.2112.

China is making the yuan more freely usable in order for it to be included in the IMF’s Special Drawing Rights basket of reserve currencies, PBOC Governor Zhou Xiaochuan said in April. Changes in the past month include opening a market for short-term loans to foreign banks and allowing cross-border sales of funds.

The IMF’s mission to China said in preliminary findings released on May 26 that the yuan is no longer undervalued, and that it will work with Chinese authorities toward its inclusion in the SDR. The currency failed to qualify at the last five-yearly review in 2010 as it wasn’t seen to be “freely usable.”

“China will have to do more on capital-account opening in order to win the yuan a chance for SDR,” said Li Miaoxian, a Beijing-based analyst at BOCOM International Holdings Co. “It has to allow freer capital flows in and out of the country. The exchange rate must be more flexible and foreign central banks should be given wider access to the domestic bond market.”

by Fion Li

APAC Financial Markets • #IMF, #MSCI, #Yuan #MarketNews

The Tell: A weakening yuan may drag its Asian peers down with it

Slowing economic growth, monetary stimulus measures, and increasingly liberal capital-account controls will likely weaken the Chinese yuan, according to a group of economists and market strategists at Bank of America Merrill Lynch — and the people’s currency would drag its peers in Asia down with it.

In a note to clients released on Monday, the group said that their baseline forecast for the yuan USDCNY, +0.0097%   has it depreciating between 5% and 10% over the next 12 months.

The Japanese yen USDJPY, +0.03%   , new Taiwan dollar USDTWD, -0.1380%   , South Korean won USDKRW, -0.06%  and Malaysian ringgit USDMYR, +0.1736%  are particularly vulnerable because China buys a significant chunk of their exports. Slowing Chinese growth will dampen demand for their goods, hurting their economies and their currencies.

While it’s notoriously difficult to unambiguously define intentional currency manipulation, the group said that any future yuan weakness won’t be the result of intentional policies. “Doing so,” they write, “would trigger competitive devaluation across the region, undermine the stability of China’s financial markets and hurt growth. From a long-term equilibrium perspective, our Compass model finds the CNY fairly valued,” they write.

To keep their currencies competitively valued, Asian central banks will likely respond to a weaker yuan by allowing their currencies to depreciate. Malaysia’s depleted foreign-exchange reserves would make its currency the most vulnerable. The central banks of Korea and Taiwan would be the most likely to intervene, the group said.

The economic slowdown in Chinese growth is the result of structural factors, including a shrinking labor force, diminishing returns on capital, stricter environmental standards and slowing productivity growth, the group said.

Chinese economic growth slowed to 7% in the first quarter, its lowest quarterly rate since 2009 — but still robust relative to other world economies. Official data showed that Chinese consumer-price inflation fell to its lowest level in four months, and producer prices declined for a 39th straight month.

In May, China’s central bank cut its benchmark interest rates for the third time in six months — and more easing measures are expected, the group said.

China is slowly opening its capital account — allowing more money to leave the country — in the hopes of persuading the International Monetary Fund to add the yuan to its Special Drawing Rights basket. The fund, which reviews the basket every five years, is expected to make a decision by the end of the year.

China’s capital and financial account deficit surged to $159 billion in the first quarter, from $97 billion in the fourth quarter, the analysts said.

Luckily, the impact on the U.S. economy will likely be minimal, but commodity-dependent currencies like the Australian dollar and Canadian dollar will likely also be vulnerable, as Chinese demand for their exports also slips.

By

JOSEPH ADINOLFI

 

APAC Financial Markets • #Asia, #Currencies, #Yuan #MarketNews

Opinion: China’s yuan has ‘Long March’ to reserve-currency status

HONG KONG (MarketWatch) — China’s latest progress on getting the yuan accepted as a reserve currency has focused attention on the big payoff: that eventually investors and central banks will load up on trillions of yuan-denominated equities and bonds.

But has Beijing really got the nerve to also proceed with the dangerous process of capital-account opening that this requires?

The Goldilocks scenario sees a fresh fund infusion driving Shanghai’s soaring equity markets even higher and delivering a much needed capital boost to China’s debt-burdened industry. But it could also turn into a bad dream. Some analysts warn that if the opening of the capital account is mishandled, it risks triggering a systematic financial crisis.

Last week, China moved another step closer to the currency big leagues after receiving the blessing of the Group of Seven finance ministers to be included in the International Monetary Fund’s (IMF) benchmark currency basket. German Finance Minister Wolfgang Schaeuble said there was agreement the yuanUSDCNY, -0.0403% USDCNH, -0.0483%  should be part of the IMF’s basket of international currencies, once technical and other issues are sorted out.

Analysts predict the move could come at this October’s IMF vote, putting the yuan on course for mainstream acceptance and beginning a process of reshaping global capital flows.

This is the second piece of positive news for the yuan, as days earlier the IMF announced that it no longer considered the yuan undervalued. Dropping this longstanding complaint looks overdue, as Chinese authorities have recently been intervening to weaken the yuan.

For some time, China has sought to have the yuan reflect its new status as the world’s biggest trading nation and second-largest economy. Acceptance as one of five currencies included in the IMF’s Special Drawing Rights would accelerate its acceptance as a bona fide reserve currency.

The rewards could be substantial, say analysts. Standard Chartered Bank forecasts that if inclusion were to happen this year, it could lead to cumulative foreign net purchases of China’s bonds and equities to reach 5.5 trillion to 6.2 trillion yuan ($890 billion to $1 trillion) by 2020. That would be roughly 10 times this year’s amount.

And China has other plans to challenge the U.S. dollar DXY, -0.06% as this year it plans to launch crude-oil contracts in Shanghai denominated in yuan.

Investors are being asked to focus on China’s final destination, as it still has a considerable journey ahead.

While a recent study by Swift puts the yuan as the fifth-biggest global currency for payments, the Chinese unit still hardly registers in overall currency trading due to its lack of convertibility on the capital account.

To really become a heavyweight currency, China must lift capital controls. Although this brings the carrot of access to foreign capital, there is also a stick: A freer yuan will force transparency on the financial system and state-owned enterprises, and it may ultimately curb much of the ruling Communist Party’s influence over the economy.

Evidence that Beijing is really ready to make these sacrifices is mixed. So far, reforms — including setting up offshore yuan-trading hubs, a Stock Connect between Shanghai and Hong Kong, as well as free-trade zones — have all been structured so authorities retain a tight grip. The Stock Connect is billed as a trial and operates under a closed loop, while the Shanghai Free Trade Zone still comes with strict quotas.

The huge challenge for Beijing is accepting it must step back and allow markets to set interest rates, to price risk and to determine who gets funding.

According to Société Générale, for liberalization to be successful, authorities need to have strong regulatory oversight, prudent monetary policy and a deep capital market.

Some progress has been made this year on domestic reform with the introduction of bank-deposit insurance in May and new measures to increase flexibility on setting deposit rates.

The belief is that domestic liberalization must proceed in tandem with lifting capital controls to help counter the prospect of capital flight. To have any chance of offsetting outflows, the yuan has to gain the confidence of international capital and also offer investable options.

This explains why creating a deep and liquid bond market where the market can price risk is deemed critical. Here, China has some way to go as it still operates with an implicit state-guarantee on debt and has yet to develop a functional insolvency regime.

To maintain confidence in the yuan during the liberalization phase, sound and sustainable macroeconomic policies are also crucial, particularly given China’s already-high debt levels, says Société Générale. Further, they add, if Beijing attempts to run another credit boom while liberalizing, a systemic financial crisis is inevitable.

This gives policy makers a further dilemma, as it is appears evident more stimulus is needed to meet the Chinese government’s 7% economic-growth target.

The odds are Beijing will opt for a cautious approach to liberalization, meaning it will also be a slow march for the yuan to reach reserve-currency status.

By CRAIG STEPHEN

 

APAC Financial Markets • #China, #ReserveCurrency, #Yuan #MarketNews

Former HKMA Official Plans Chinese Bond Fund for Institutions

A former head of Hong Kong Monetary Authority’s direct investment division, which oversees more than $250 billion of foreign exchange reserves, plans to start his own Chinese bond funds.

Brummer & Partners has bought a stake in Edmund Ng’s Hong Kong-based Eastfort Asset Management, the Stockholm-based hedge-fund firm overseeing $17 billion of assets said in a statement. Eastfort is waiting for approval from Hong Kong’s Securities and Futures Commission to start operations.

Ng plans to start funds that invest in Chinese bonds traded both domestically and internationally in anticipation that global institutions will buy more yuan-denominated fixed income as the yuan becomes a reserve currency. Demand for Chinese bonds is also expected to be bolstered by market reforms, including allowing foreign investors wider access to the local market and interest-rate liberalization.

“Our vision is to set up a top yuan bond fund house for institutional investors,” Ng, who left the de facto central bank in May, said in an interview.

The International Monetary Fund is likely to include the yuan in itsSpecial Drawing Right basket of currencies this year, legitimatizing it as an international reserve currency, Bank of America-Merrill Lynch said in a March 25 report.

The yuan may be given a 13 percent weighting, putting it ahead of the pound and Japanese yen, the report said. Foreign central banks now hold as much as $80.5 billion of yuan-denominated onshore bonds, Merrill Lynch estimates. That compares to the $11.6 trillion of foreign-exchange holdings that IMF data showed countries held at the end of last year.

QFII Quotas

Currently, foreign investors can only buy yuan bonds traded in China if they directly receive a quota in the local interbank bond market or through a dollar or yuan qualified foreign institutional investors, or QFII, quota.

Regulators have expanded yuan-denominated QFII quotas to 920 billion yuan ($148 billion). They are also considering allowing international investors to buy bonds through the six-month-old link of the Hong Kong and Shanghai stock exchanges, the Shanghai bourse’s President Huang Hongyuan said in January.

Ng expects bond issuers in China to become more diverse, with a range of credit profiles and risk premiums.

“Since the credit differentiation process has started and will continue in the next two to three years, there will be many opportunities for investors and fund managers,” Ng said.

Before joining the HKMA in 2007, Ng spent almost 20 years at JPMorgan Chase & Co., rising to a managing director leading fixed-income and derivative trading in Asia outside of Japan, according to an official biography.

He helped the HKMA expand investments from government and agency bonds to emerging markets and developed markets credit, as well as the use of derivatives.

by Bei Hu

APAC Financial Markets • #Bonds, #BrummerPartners, #ChineseBondFund, #Domestic, #EastfortAssetManagement, #HKMA, #Institutions, #International, #Yuan #MarketNews

China Considers Doubling Its Local Bond-Swap Program

Chinese policy makers are considering plans to as much as double the size of the clean-up program for shaky local government finances, according to people familiar with the discussions.

In what would be the second stage of the program, 500 billion yuan ($81 billion) to 1 trillion yuan of local-government loans would be authorized to be swapped into bonds issued by provinces and cities, the people said, asking not to be named because the talks are private. The first stage of the bond swap, currently under way, is 1 trillion yuan.

An expansion would signal officials are confident in the template they’ve crafted for reducing the risks of a record surge in borrowing that local authorities took on in recent years, funding a glut of investment projects. The complex process includes inducements for banks to buy new, longer-maturity, lower-rate bonds.

“The initial success of the first batches of bonds, especially the lower-than-expected yields, may have encouraged the Finance Ministry to expand the swap,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong. “Additional swaps, if confirmed, can show China’s handling of the local government debt problem will be faster than previous expectations.”

Approval Pending

The up-sized plan needs State Council approval, according to the people. The Finance ministry didn’t immediately respond to a faxed request for comment. Finance Minister Lou Jiwei had previously said that the swap program could be expanded.

Chinese stocks extended gains after the news, with the Shanghai Composite Index up 1.9 percent as of 10:30 a.m. local time. By contrast, the MSCI Asia Pacific Index was down 0.5 percent.

By reducing debt-servicing costs for local authorities, policy makers are helping them sustain spending that’s crucial to shoring up China’s economic growth. A gauge of manufacturing today suggested that the fiscal loosening, along with monetary easing by the central bank, has helped arrest a deterioration.

APAC Financial Markets • #Bonds, #China, #Financing, #LocalBond, #LocalGovernmentLoans, #SwapProgram, #Yuan #MarketNews