Analysts Doubt Depth of U.S.-China Yuan Pact as Talks Resume


© Reuters. Analysts Doubt Depth of U.S.-China Yuan Pact as Talks Resume

(Bloomberg) — Don’t expect a major pact on China’s yuan. That’s what analysts are saying as U.S. officials arrive in Beijing for another round of negotiations for a comprehensive trade deal.

Questions remain over why China would acquiesce beyond existing multilateral commitments to avoid competitive devaluation of the yuan. There’s also skepticism about how any exchange-rate pledge can be enforced in an economy noted for its opacity.

While U.S. Treasury Secretary Steven Mnuchin stoked expectations for the “strongest ever” currency agreement, Chinese officials including central bank governor Yi Gang have talked about the need to respect “autonomy” and hosed down suggestions for a one-sided deal.

Instead, provisions in renewed U.S. trade agreements with Mexico, Canada and South Korea may offer clues on a possible template for China to follow.

China’s case has been helped by a 2.3 percent rally in its currency this year, compared with 2018 when the yuan tumbled more than 5 percent amid the trade uncertainties and a slowing economy. The yuan fell 0.17 percent to 6.7265 per dollar Wednesday.

Markets and policy watchers are talking about how the currency element could pan out. Here’s a selection of views:

Hui Feng, a senior research fellow at the Griffith Asia Institute and co-author of “The Rise of the People’s Bank of China.”

  • Currency manipulation by China is no longer an imperative in the post-Great Financial Crisis era due to factors such as the increase of domestic real wages. Even the International Monetary Fund recognized that the yuan exchange rate is now close to equilibrium.
  • Beijing has also learned lessons from the 2015-16 episode of capital flight due to a devaluation and realizes it’s in its own interest to keep the yuan relatively stable.
  • Any meaningful deal in this regard would be difficult to enforce, as defining the market level of the exchange rate is subject to debate and accusing government manipulation is even more difficult, especially in China’s case.

BNP Paribas (PA:) Asset Management (Bryan Carter, head of emerging markets debt)

  • A broad currency agreement to allow market forces to determine exchange rates or to commit to a stronger yuan in line with economic fundamentals could be supported by both sides.
  • It’s unlikely that China would realign its real effective exchange rate basket or its daily fixing procedure due to foreign pressure.
  • Don’t expect any specific measures that would impinge on the central bank’s flexibility. If there was to be greater data transparency and oversight in China, it would almost certainly be achieved via the IMF’s data dissemination standards.
  • China won’t want to backtrack from years of moving toward a more market-oriented approach.

Toronto-Dominion Bank (Mitul Kotecha, senior emerging markets strategist)

  • A simple agreement not to engage in competitive devaluation might be the most China will agree to. It’s unlikely they’d agree to prevent weakness against the dollar.
  • It’s possible they might consider volatility management, which might be more binding on the yuan downside.
  • Important to remember that a currency clause would be made legally binding by its inclusion in official trade agreement documentation.
  • Look to the U.S.-Mexico-Canada agreement signed last year and the U.S.-South Korea trade deal for clues. These deals included agreements to disclose all data on foreign-exchange activities, including amounts of intervention.

Ebury Partners (Enrique Diaz-Alvarez, chief risk officer)

  • China will likely commit to prevent further weakening of the yuan from current levels and make the currency more flexible in a trade deal with the U.S.
  • A more liberalized foreign-exchange market will allow China to promote the yuan’s global use.
  • Any explicit mention of the yuan in the trade deal would refer only to its rate against the dollar.

FXTM (Jameel Ahmad, global head of currency strategy & market research)

  • The U.S. may ask for reassurances that Chinese authorities will pledge stability in the yuan and will not allow the currency to weaken past a certain level against the dollar.
  • There wouldn’t be obstacles to implementing the deal from the side of China, which is armed with large foreign reserves and strong fiscal conditions.
  • A currency deal may strengthen the yuan by as much as 5 percent, which would be encouraging to emerging-market sentiment and help prolong the recovery in China’s stock markets this year.
  • A deal would also help the nation liberalize its financial markets.
  • A rally in the yuan will reduce inflationary pressures and increase consumer confidence and spending, which will help China make its economy more domestically-led.

Australia & New Zealand Banking Group (Khoon Goh, head of Asia research)

  • Whatever agreement is struck will most likely be similar to the currency chapter that was contained in the trade re-negotiations between the U.S., Canada and Mexico, where all parties agreed not to manipulate exchange rates.
  • A currency deal probably won’t have much material bearing for the yuan as Chinese authorities have tended to support the currency when it is weak rather than deliberately trying to weaken it.
  • While China publishes official foreign reserves data every month, an agreement may require it to go a step further and actively disclose actual intervention activity. This is unlikely to be a huge hurdle.
  • China would still like to see a stable exchange rate that will provide a conducive backdrop for ongoing reforms. It doesn’t want a currency that is too weak after the 2015 devaluation.

(Adds latest yuan level in fifth paragraph.)

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