A Brief Look at Yuan Valuations

With China continuing to see high inflation and the PBOC implementing a series of monetary policy tightening moves, the Yuan (or particularly the Yuan-Dollar exchange rate) has been highlighted as a potential inflation fighting tool. To be sure, there is also the ongoing chorus from the US urging China to allow a more flexible exchange rate. They say the exchange rate is artificially kept high; granting China an advantage in trade. So with these points in mind, and noting the impending talks between China and the US, it is timely to take a look at some Yuan data, and perhaps developing an informed view.

http://seekingalpha.com/article/268830-a-brief-look-at-yuan-valuations

Is China's Inflation Peaking?

China just released its regular monthly (and March quarter) data dump, and this article provides a brief update on two key statistics: GDP and CPI (for reasons which I will explain later). First up, a review of the results: Q1 2011 GDP growth came in at 9.7%, compared to consensus 9.4%, and previous 9.8%. Consumer price inflation rose to 5.4% in March, compared to consensus 5.2%, and previous 4.9%. So some very interesting results there.

http://seekingalpha.com/article/263862-is-china-s-inflation-peaking

China International Trade Review - September 2010

China's trade rebound continued in September as global demand normalised as businesses churn through inventory and consumer spending slowly edges up (but well below trend). The September quarter saw trade rising on a quarterly basis with all exports, imports and the trade surplus rising vs the June quarter; with both exports and imports hitting a record high quarterly result in September. Thus marks China's return to pre-crisis levels, but with global demand potentially slowing - led by the subdued recoveries in Japan and the US - China will increasingly need to look internally to drive economic growth (short of further expanding market share of exports, and selling higher margin goods).


Of course the highlight of the September result, or perhaps more - the standout - is the recovery in the trade surplus. The trade surplus is still relatively low historically on both a quarterly, monthly, and rolling annual basis - but is certainly trending upwards. It would still take a significant mentality shift or significant global structural economic changes for the Chinese trade surplus to turn significantly negative. But a negative trade balance should actually be an objective in China's 5-year plan. Such a shift would be the most sustainable for China - perhaps it would also mean that the environmental sacrifice that China has made in the name of economic progress could be reversed or slowed. But in any case the economic and environmental sustainability of the Chinese miracle is a game of huge stakes that the Chinese leadership will need to play carefully and resolutely.


The strategic implications or themes from the trade results include:
1. A continued rise in demand for imports (lead by inputs for production), providing opportunities for trading partners at the country and firm level - which will lead to flow on benefits to those economies and financial results respectively.
2. A continued rise in the trade surplus, which will weigh in on global politics and rhetoric around the so-called currency wars (providing ammo for critics, and raising further the China trade surplus scape-goat flag for US politicians).
3. A strong recovery in volumes for Chinese exporters, which will lift profits for those companies - and potentially lead to eventual wage rises; thus lifting average wages and potentially stimulating domestic demand (and price pressures).
4. The broader threats and opportunities for China and its trading partners at a country and geopolitical strategy level (in terms which direction the leadership of China will focus policy e.g. at an economic level; trade driven or domestic demand driven).
5. The imperative for boosting domestic demand; and the ultimate inevitability of it. This will provide opportunities for those who serve the Chinese consumer, whether they do so from within China (probably the greatest opportunity), or from elsewhere.

Sources
Econ Grapher Analytics www.econgrapher.com
China Customs www.customs.gov.cn

Article Source: http://www.econgrapher.com/13oct-chinatrade.html

China International Trade Review - August 2010

China reported further strength in exports in July, with exports rising 38.1% year on year to $145.5 billion (up from $137 billion in June). This surge drove the trade balance up to a 19 month high at $28.7 billion as imports remained relatively flat at $116.8 billion (up 22.7% off last year). The results point to some potentially interesting trends underway in global trade.


Looking to the chart below it's clear where the strength is coming from; exports. It is interesting that exports continue to go from strength to strength as international trade volumes continue to recover. Indeed the latest result on the export front is the highest on record, this means that somewhere out there someone is still buying, and this will help put somewhat of a floor under the Chinese economy (but then again we all know how rapidly and totally global trade can drop if bad times resurface).


Probably the most concerning aspect, if any, in the data is the static import growth; sure imports are at relatively high levels since the slump, and are generally higher than pre-crisis levels (345 vs 312 in 2008 on a rolling quarterly basis), but it does show China having a slightly lower impact on driving global trade. As a barometer of China's spending (and potentially even its economic health), as well as a high frequency indicator of global trade; Chinese imports will be important to watch over the coming months, particularly if any further strength comes through to the Yuan.

Sources
Econ Grapher Analytics www.econgrapher.com
China Customs www.customs.gov.cn
Bloomberg www.bloomberg.com

Article Source: http://www.econgrapher.com/11aug-chinatrade.html

China Report: PMI Numbers Indicate Possible Slowdown

China had its PMI numbers out today, with the official CFLP index registering at 52.1, down both against consensus estimates (Reuters) 53.1, and the May figure of 53.9. The HSBC index (which surveys 400 businesses, and is weighted to smaller/privately owned businesses than the CFLP index) confirmed the direction; down to 50.4 vs 52.7 in May.


So what do the PMI numbers tell us? Well for one thing the index is still just above 50 which indicates expansion. But the indexes have both fallen off notably, which indicates that expansion is slowing down. Note what I said in both comments: expansion. But also note the background - context is everything! There have been a number of moves this year made by the authorities in China to slow down the economy in order to avoid overheating (e.g. increasing the required reserves, clamping down on loan growth, allowing wages to rise - though that one's a positive or a negative depending on the sector, and starting to allow the Yuan to move a little).

So several key questions arise (and half of knowing the answer is knowing the right questions):
1. Is this slow down in the industrial sector purely a result of policy tightening?
2. Is the slow down a result of the waning or withdrawal of the massive stimulus measures taken in early 2009?
3. Is the slow down driven by a tapering off of international demand?


Of course, the long term story for China still remains bullish (and perhaps even more sustainable if policy tightening prevents bubbles), but it's looking increasingly like interesting times will arise over the short to medium term. The next big data release from China (which will contain GDP, as well as the usual CPI, industrial production, etc), which is due on the 15th of July, will be particularly interesting in this context. But of course, the near term outlook remains, as Premier Wen Jiabao said; "extremely complicated".

Sources
Econ Grapher Analytics www.econgrapher.com
National Bureau of Statistics www.stats.gov.cn
CFLP www.chinawuliu.com.cn
Markit/HSBC www.markiteconomics.com
Yahoo Finance finance.yahoo.com

Article Source: http://www.econgrapher.com/1july-chinapmi.html

China Announces Yuan (CNY) Flexibility

So China has just announced that it will "Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility". See the full statement here.

Just what exactly this means remains to be seen, but this is a very positive move, and from a global economic stability standpoint will now allow some of the focus to be shifted towards some of the other sources of imbalances like US (and other developed nations) profligacy both on consumer finances and government finances.

But more on the announcement, and some clues as to what might follow... Here's what happened last time (for some more background on the CNY click here):

They have already explicitly ruled out a large one-off revaluation.

"China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist."

They also noted that the daily +/- 0.50% band will not change:

"In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market."

So, we're left with no change to the band, and no large one-offs. This leaves a few possibilities like changes in the basket of currencies to which the yuan is pegged. But most likely it will just mean that the authorities there will take a slightly more hands-off approach to the Yuan. So for example we could see a series of daily 0.50% moves. So this may end up in a more flexible market driven state. But of course the point of a market is that prices can move (up or down) depending on demand and supply - and relative prices. So there could even be scope for a depreciation of the Yuan against some currencies.

But above all this remains a very positive development in terms of financial and economic reform in China, and a vote of confidence in the Chinese economy:

"The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility."

And indeed, a vote of confidence in the global economic recovery. The move will also serve to assuage some of the protectionist sentiment that had been rising e.g. US tariffs etc. This is important, because protectionism needs to be avoided at all cost in ensuring the recovery. But above all this announcement may herald the rise of a truly sustainable, and structural global economic recovery.

Sources
Econ Grapher Analytics www.econgrapher.com
People's Bank of China www.pbc.gov.cn
Yahoo Finance finance.yahoo.com

Article source: http://www.econgrapher.com/20jun-cnyflex.html