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 Some foreign central banks are increasingly worried about the impact
falling Chinese prices and a weaker yuan could have on their
economies, following a surprise devaluation in the currency last
month.
Since then investors have been betting the yuan, or renminbi, could
fall further, reflected in a wide spread between the offshore and
more-tightly controlled onshore rates.
On Wednesday afternoon though a surge of buying sent the offshore
rate up more than 1 percent, in what market sources said was a move
by Chinese state-owned banks to curb speculation against their
currency.
Sliding Chinese stock prices and currency have rattled global
markets and prompted a flurry of policies and intervention by
authorities to steady the world's second-biggest economy.
Earlier, New Zealand's central bank governor Graeme Wheeler said the
yuan devaluation had left them concerned about the risk China may
let it slide further.
"We've seen authorities basically say they want to stabilize the
renminbi, but if there were to be a very substantial depreciation in
the renminbi it would certainly export deflation around the rest of
the world, so everybody is looking closely at China," he said at a
press briefing following an interest rate cut in New Zealand.
The deflation threat was underlined by data showing that Chinese
manufacturers cut prices at their fastest rate in six years, with
the producer price index (PPI) down 5.9 percent in August from a
year earlier, though consumer prices are rising for now.
"The risk for China is still deflation, not inflation," said Kevin
Lai, chief economist for Asia, excluding Japan, at Daiwa.
"PPI deflation will eventually filter down to affect CPI, and
aggregate demand will continue to be weak," he added.
A growing worry for overseas central banks like the Reserve Bank of
New Zealand (RBNZ) is that falling Chinese factory gate prices
coupled with a weaker yuan mean the price of exports from China will
fall sharply, feeding downward price pressures into their economies.
Wheeler's comments came despite attempts by Chinese policymakers to
reassure global markets that the yuan will remain stable and China's
economic growth, whilst slowing, is still set to be around 7 percent
this year.
"The RBNZ...verbalized it but this is probably an underlying concern
shared by policymakers around the region," said Sim Moh Siong,
foreign exchange strategist at Bank of Singapore.
REASSURANCE
Since the devaluation, China has scrambled to keep the yuan steady,
running down its foreign exchange reserves by a record amount in
August to stabilize the onshore rate.
Wednesday's rise in the offshore yuan was the clearest indication to
date that China will also try to stop speculation against its
currency outside of the mainland.
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"The big picture is that policy makers are doing everything they can
do to dampen expectations that the yuan will depreciate much," said
Mark Williams, an economist at Capital Economics in London.
The offshore yuan spot rate strengthened more than 1 percent to 6.39
per dollar from 6.4698 earlier in the day.
Chinese Premier Li Keqiang, for the second day running, used a
speech to tell business leaders and investors on Wednesday that
China does not want a currency war and that the slowdown in its
growth rate will be modest. The economy grew 7.3 percent last year.
"China's economy will not see a hard landing" he told a gathering of
the World Economic Forum in Dalian in northeastern China.
"Once there are signs of economy slipping out of the reasonable
range, we will be fully capable of handling (the situation)."
The economic signs are gloomy. After Li spoke, a report showed auto
sales in China were flat in the first eight months of the year,
raising the specter of the market's first contraction since the late
1990s.
Global markets' worries about Beijing's handling of the economy and
its currency have been exacerbated by China's attempts to stem the
slide in its equity markets. Despite a barrage of policies to
support stock prices and push out speculators, its equity markets
have fallen around 40 percent since June.
The past two days though have seen Chinese stocks push higher, with
the positive sentiment feeding into other major equity markets
around the world. Still, that optimism was waning on Wednesday, with
share prices back in the red.
The CSI300 index of the biggest stocks listed in Shanghai and
Shenzhen ended down 1.23 percent, while the Shanghai Composite Index
was 1.45 percent lower.
(Additional reportying by Winni Zhou, Xiaoyi Shao and Kevin Yao in
Beijing, Nathaniel Taplin in Shanghai, Masayuki Kitano in Singapore,
Ian Chua in Sydney, Gerry Shih in Dalian; Michelle Chen in Hong
Kong; Writing by Rachel Armstrong; Editing by Neil Fullick)
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