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Friday, February 28, 2014

urrency Of China Continues To Decline


SHANGHAI — The value of China’s currency, the renminbi, continued to slide against the United States dollar on Friday, rattling investors by falling to its lowest level in nearly a year before closing higher.
The weakness in the renminbi, which has been dropping steadily in 2014, reverses a trend of gradual incremental appreciation against the dollar and other major currencies during the last eight years.
Analysts say China’s central bank is intervening heavily in the currency markets, intentionally engineering a slide in the value of the Chinese currency to punish speculators and prevent huge capital flows, or so-called hot money, from entering the country. The huge inflows of capital are showing up in China’s economic figures, with some analysts estimating hot money inflows last year at $150 billion.
The authorities worry that the large inflows could generate inflationary pressure and complicate the central government’s effort to revamp China’s economy, improve the banking system and eventually free up interest rates.
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Shopping for vegetables at a market in Hangzhou, Zhejiang province, China. The renminbi has fallen 1.5 percent this year. CreditChina Daily, via Reuters
The latest drop in the renminbi caps off a volatile period for the currency. Since the beginning of January, it has lost around 1.5 percent of its value against the dollar. On Friday, the renminbi lost 0.3 percent of its value, hitting 6.145 to the dollar; the intraday drop of almost 1 percent was the biggest in years.
The sudden drop has surprised investors, who have become accustomed to a slow and steady rise in the currency. Last year, the renminbi was one of the world’s strongest-performing currencies, rising 3 percent against the dollar.
The recent currency weakness has weighed on the markets, which have been rattled lately by a slowdown in the vast real estate market and other economic concerns. This week, the CSI 300 index of big companies on the Shanghai and Shenzhen stock markets dropped more than 3.5 percent. While the Chinese authorities maintain tight control over the flow of money into the country, global investors have found ways to funnel hot money into China, often through trade financing deals. Speculators do so hoping to capitalize on something not so easy to find outside China: an economy wedded to fast growth, high interest rates and a steadily appreciating currency.
“It’s hard to completely stop” hot money from flowing into China, Wang Tao, the chief China economist at UBS, said. “Offshore, the interest rates are low; Chinese interest rates are really high. And if the exchange rate is appreciating, investors view it as a win-win.”
By weakening the value of the renminbi, the authorities here apparently hope to make it harder for speculators to engage in a one-way bet on a rising renminbi, in what is essentially an arbitrage game between interest rates in the advanced economies outside and higher rates in the more tightly controlled Chinese system. For speculators, currency appreciation is seen as an added benefit.
But low interest rates in the United States and Europe mean there are few places to invest. At the same time, Chinese companies are desperate for cash because of rising interest rates at home and tighter bank liquidity.
Analysts say the government wants speculators to know that making such a bet on appreciation could backfire, if appreciation slows or even reverses course, and that is why the last few days have been so volatile.
In a statement this week, China’s State Administration of Foreign Exchange, a division under the central bank, suggested the market volatility had been normal. “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies,” it said. “The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to overinterpret it.”

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