China: Sept. Inflation Report & What's Next for Yuan, China Currency Bill

 
on October 13 2011 3:39 PM

 

 

There's been a lot of news recently regarding China, and we have another important release scheduled for later today in the form of China consumer price data.

Inflation Report to Help Determine If PBOC's Actions to Stem Inflation are Working

Release: Consumer Price Index y/y Time: 9:30PM ET (00:30 GMT, Oct 14th) Forecast: 6.1% , Previous: 6.2%

As know the Chinese government has made it a priority to stamp out inflation, which rose to uncomfortably high levels earlier this year.

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The central bank in China - the People's Bank of China (or PBOC) - has responded by raising interest rates (to 6.56% for the one-year lending rate) as well as increasing the bank reserve ratio requirement to 21.5% - the largest on record.

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The strategy seems to have succeeded in that inflation has peaked in July at a 6.5% annual rate, alongside a slide in commodities which accompanied the financial turmoil we saw in August and September. However, we still remain in sight of those of those 3-year highs set in July, and inflation remains far above the central bank's target of 4%.

This inflation report from September therefore will tell us whether Chinese authorities will continue to act aggressively to temper down inflation expectations, or if the previous tightening campaign by the central bank has worked enough for authorities to consider the slowing global economic picture.

If inflation comes in stronger than expected it could mean the PBOC is not done yet tightening rates, which would be tough considering the economy seems to be slowing as well. Prospect of higher inflation in China is negative for risk sentiment.

If inflation cools, then it gives the PBOC scope to keep rates steady, if not lower them if needed to changing conditions with the economy.

Here's an article from Reuters from today: China's inflation data on Friday may show price pressures fading at a time when its economy is shuddering from softer demand abroad, giving Beijing room to keep monetary policy on hold for now. Cooling price pressures would also assure investors already unnerved by Europe's debt crisis that the world's No. 2 economy has scope to slightly relax monetary conditions to support growth if need be.

Twenty one economists polled by Reuters showed a median forecast for inflation to ease a touch to 6.1 percent in September from 6.2 percent in August. Factory inflation is also seen cooling to 6.8 percent, from August's 7.3 percent.

Chinese Trade Balance Data Softens in September

We had another important macro release from China overnight which was the September trade balance report. There we saw a sharp drop-off in exports, especially from Europe.

From Bloomberg: Exports rose a less-than-forecast 17.1 percent in September from a year earlier, the bureau's data showed in Beijing. The trade surplus was $14.51 billion, the smallest since May. Growth in shipments to Europe, China's biggest export market, slumped to 9.8 percent, from 22 percent, amid the sovereign-debt crisis in euro-region nations. Export growth compared with a median forecast of 20.5 percent and a rise of 24.5 percent in August.

The Yuan's Gradual Appreciation

A weakening export picture makes Chinese authorities less willing to allow the Chinese yuan to appreciate against the US dollar and other currencies.

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Here's a look at the yuan over the last 5 years and we see that China is letting the yuan appreciate, though at a gradual rate.  We see that as the global economy stalled in the middle of 2007 and turned to recession in 2008, the Chinese intervened to keep their currency steady against the dollar. In the middle of 2009 we do see the authorities allowing the yuan to strengthen yet again. Overall, China's currency has risen 3.25% in value against the dollar this year and more than 20% since Beijing started loosening its tight peg to the U.S. dollar in 2005.

China Currency Bill Passes Senate, China Responds that it Could Spark Trade War

While the softer trade data from China is a sign that the higher yuan is weakening Chinese exports amid a new global slowdown that is weighing on demand, in the US, the Chinese currency has taken up more importance in Washington.

The pressure on China to allow its currency to appreciate has increased as the U.S. Senate voted this week for legislation aimed at forcing a faster appreciation of the yuan, not in those words of course. This has recently created a lot of talk and fear that if this bill passes it could ignite a trade war between the #1 and #2 economies in the world.

From Xinhau: Arguing that the RMB yuan's exchange rate is not the cause of China- U.S. trade imbalance, China expressed its strong oppositions hours after the U.S. Senate passed a controversial bill that would slap tariffs on Chinese goods for the so-called currency manipulation, warning the U.S. politicians against politicizing the issue of China's currency and resorting to trade protectionism.

China's Vice Foreign Minister Cui Tiankai on Monday warned that the bill could trigger a trade war and hold back global economic recovery, and it might have an adverse impact on the development of the relations between the two countries. Should the proposed legislation become law, the only result would be a trade war between China and the US and that would be a lose-lose situation for both sides, Cui said.

 

 

 

Despite the tougher talk, the news did herald a response from the Chinese, as the PBOC let the yuan strengthen against the dollar.

From CNN: For the second consecutive day after a U.S. Senate vote aimed at penalizing China for undervaluing its currency, Beijing lowered the range at which the yuan could trade against the dollar.

The People's Bank of China (PBOC) first lowered the band at which the yuan is allowed to trade against the dollar just hours after the U.S. Senate approved a bill that pressures China to allow its currency to rise faster.

With such important consequences, how will this bill do now that its cleared one chamber of Congress?

Pelosi Calls for Vote in the House, but Republicans and White House On Same Side in Disagreeing

Nancy Pelosi has called for a vote on the bill in the House, but the Republican leadership is opposed and the White House has voiced its reservations with such a bill.

From the Hill:  House Minority Leader Nancy Pelosi (D-Calif.) on Wednesday said the House should vote on a bill punishing China for its currency manipulation before members consider three free-trade agreements (FTAs), although the House was scheduled to approve the FTAs in just a few hours' time.

On the House floor, Pelosi argued that the Colombia FTA is only expected to help create a few thousand jobs, while other estimates say China's manipulation of its currency is costing the United States more than 1 million jobs each year.

It's not often you see the House Republicans and the Obama administration in agreement, but from the administration's position it may not be possible to enforce the legislation if it violates WTO treaties.

The fate of this bill in the House will be an interesting one, and could have big ramifications for the global economy. Let's see how events unfold over the next few weeks, and what chance this bill has of passing the House. We should also watch to see how Chinese authorities respond via the pace of yuan appreciation.

We therefore have our eye on the inflation report to help us guage what the PBOC may do regarding rates, and we'll follow the progress of this China currency bill and monitor the pace of yuan appreciation in the medium term.

Good trading.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

 

 

 

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