China Pushes Yuan Against the Tide

By Anjani Trivedi 

        As pressure mounts on China's currency to fall, Beijing is stepping up efforts to keep it strong.
        On Thursday, the central bank set the yuan at its highest level against the U.S. dollar in over a year, defying a raft of poor economic reports this week, signs of mounting capital outflows and the launch of broad stimulus package aimed at juicing up the sluggish economy.
        The forced upward path of China's currency is challenging policy and financial-market norms. In other countries monetary easing as aggressive as the stimulus package would typically send a currency tumbling, as it did in Japan, Europe and the U.S. But China is in the midst of a push to get its currency more widely traded abroad and to gain reserve-currency status with the International Monetary Fund, goals that could grow harder to reach if the yuan were to significantly weaken or show instability.
        Beijing's economic goals are also changing. China is seeking to shift toward a consumption-based economy that isn't so reliant on cheap exports and investments. This would give it more room to keep the yuan, also known as the renminbi, strong and stable.
        "The aim is slightly different these days," said Lin-Jing Leong, a portfolio manager at Aberdeen Asset Management, with $490.8 billion under management. "Given the fact that they are trying to internationalize the renminbi, that is the bigger plan. They've been moving towards this for the last five years--step by step, stone by stone."
        Ms. Leong's funds are overweight on Chinese bonds, and she expects the currency to be stable.
        The People's Bank of China sets a daily reference rate against the U.S. dollar; the yuan is allowed to trade within a band that extends 2% above and below this rate. On Thursday, the currency touched its strongest since early May. The currency last traded at 6.2017 to the dollar and was set at 6.1093.
        But many question whether Beijing will be able to achieve all its goals. David Woo, global head of currencies and interest rates strategy at Bank of America Merrill Lynch, points to an oft-stated law of economics--that no country can simultaneously have a fixed exchange rate, and independent monetary policy and an open capital account. It is known as "the impossible trinity."
        "Even China will not be able to defy economic logic," said Mr. Woo.
        Underscoring the growing outflows, by BNP Paribas estimates a record $840 billion left the country in the first quarter of this year, based on preliminary balance-of-payments data released Wednesday.
        And as the U.S. sets its eye on raising interest rates--as soon as September by some forecasts--while China has cut interest rates three times since November, the monetary-policy divergence is putting further pressure on the currency as investors pile into U.S.-dollar assets.
        This divergence between the U.S. and China "is going to expose the contradictions of China's internal policy mix," Mr. Woo said.
        The authorities' stubborn stance on the currency also comes as they try to fit global accounting standards on presenting economic data, among other measures to gain a global standing.
        Write to Anjani Trivedi at anjani.trivedi@wsj.com
        (END) Dow Jones Newswires

        May 14, 2015 01:41 ET (05:41 GMT)

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