China’s Currency Manipulation Mangle
As the US Treasury again postponed findings and the IMF changed its assessment to slightly undervalued, China’s currency regime was prominent in the US presidential campaign with Republican candidate Romney’s charge of manipulation as both the yuan and Hong Kong dollar resumed appreciation toward their upper bands. Capital flight abated on the mainland as state banks were once more net foreign exchange sellers, and yields on renimbi-denominated HK bonds leveled after a 300 basis point leap. The turnaround accompanied a solid Q3 official economic report prior to the 5-year Communist party congress charting a 7.5 percent GDP rise on decent domestic and external figures including only modest home price decline. Core fixed asset investment was up 20 percent and retail sales were just behind at 15 percent on PMI almost at 50 and inflation under 2 percent. Ratings agencies weighed in with assurances of policy flexibility to avoid hard landing through fiscal stimulus and consumption incentives, especially in alternative energies like wind and solar encountering soft demand from industry and subsidy complaints from trading partners. The central bank has mounted record repo operations to ensure liquidity can be on-lent to smaller firms in recent months, and one-tenth of exports and one-quarter of FDI are now settled in renimbi, which has hit a decades-high against the greenback even though non-deliverable forwards anticipate another slippage bout. Local and regional governments that have already borrowed heavily have launched their own incentive and infrastructure programs as repayments loom and revenues slacken. The major copper producing province of Yunnan, for example, is offering discount loans to metals companies despite an 8.5 percent forecast drop in use this year. The national planning body has cited raw materials overcapacity as well in cement, steel and other areas requiring less power supply increased only 5 percent in the latest quarter. World commodity values have fallen on waning Chinese appetite contributing to lower economic growth and corporate earnings outlooks across the BRICS universe.
Hong Kong banks have experienced share losses with one-quarter of their assets mainland-related, and the government’s tougher line toward property speculation and income inequality under its new leader. Social policy has entered the agenda with guaranteed minimum wage and pension proposals in contrast with the traditional lasses-faire approach, and the stock-exchange has mirrored the stance with stricter underwriting and anti-insider rules. Rural retirement schemes have been initiated across the border post-crisis, but portfolios are confined to low-return bank deposits and pools have reportedly been diverted for a variety of other purposes. Many stock market investors argue that a developed private pension pillar could offset retail-driven volatility, as the offshore center otherwise girds for eventual currency change after another test of the upper 7.75 to the US dollar peg bound, with the monetary authority deliberately manipulating the outcome through a parallel historic lens.
