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China's Strong Yuan Can't Be Justified

Jul 10, 2013, 21:16 IST

Chinese trade data unexpectedly fell in June. This has raised some concerns about the strength of the Chinese yuan.

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"One key policy take-away from this trade report is probably that the strength of the yuan can hardly be justified," wrote Societe Generale's Wei Yao in a note to clients.

The yuan has already had a strong climb in trade-weighted terms. And this will impact the nation's export competitiveness, even as external demand remains weak.

"Since end-August 2012, the CNY has gained 3.3% against the USD. Over the same period, however, the CNY has appreciated from 12.3 to 16.2 Japanese yen (JPY), a net 31.7% gain. We estimate that the CNY nominal effective exchange rate (NEER) has risen by a net 7.8% since end-August 2012," writes Standard Chartered's Robert Minikin.

Standard Chartered

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"The combination of the powerful climb in the CNY’s trade-weighted value, China’s lackluster export performance and subdued domestic inflation suggests to us that more CNY appreciation is not warranted near-term," according to Minikin.

China has also been cracking down on speculative Forex inflows, that has in part been reflected in the disappointing trade data. China controls capital inflows and outflows to prevent a rise in asset bubbles.

"As capital inflows are curtailed, the balance in the currency market should tilt towards yuan depreciation," writes SocGen's Yao.

Those betting on yuan appreciation should be more cautious.

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