Currency set to rise while other emerging economies face problems
Jul. 4 - The eurozone crisis is taking a toll on emerging economies as their currencies record their biggest falls against the dollar since 1998, but the yuan is well placed to appreciate, analysts said.
"The recent weakness of the yuan and other currencies of emerging economies was not due to depreciation," said Cao Yuanzheng, chief economist at the Bank of China.
"Instead, the real reason is the rapid appreciation of the dollar as it became a 'safe haven' for investors," seeking shelter from the eurozone storm.
The yuan weakened 0.88 percent in the second quarter to 6.3541 to the dollar in Shanghai, the biggest quarterly decline since it de-pegged from the dollar in 2005.
It dropped 0.77 percent to 6.3610 in Hong Kong's offshore market during the same period.
The central bank lowered the currency's daily reference rate, its rate against the dollar, by 0.48 percent in the second quarter, while the dollar index, which rates the dollar against a basket of currencies, strengthened 4 percent as investors favored safer assets, according to data collected by Bloomberg.
The yuan has been allowed, since April, to trade as much as 1 percent on either side of the daily reference rate.
Safe-haven demand has driven the dollar up and dragged down currencies of emerging economies, the Bank of China said last week.
By mid-June, the dollar index had climbed to 75.4 percent, an increase of 3.6 percent from the beginning of the year.
Currencies of the major emerging economies, such as Brazil, Russia, South Africa and India, depreciated in the second quarter between 10 to 13 percent, the biggest fall since 1998.
The Brazilian real witnessed the most dramatic fall of 13 percent, while the Indian rupee hit record lows against the dollar. The rupee has depreciated 10 percent since the start of April against the greenback.
"Capital outflow triggered by concern at the economic slowdown in these countries has led to falling currencies," said Wan Jun, an analyst at the Chinese Academy of Social Sciences.
Zhong Hong, an analyst at Bank of China, said that the outlook would be different from the third quarter on.
"For emerging economies, depreciation benefits exports, therefore it cannot be ruled out that some countries will tolerate the situation. But in the third quarter, the outlook for these currencies will be mixed."
Zhang Monan, an economist at the State Information Center, said that although the yuan declined against the dollar recently, the scale is far less than other emerging economies.
"And China's economic strength means that long-term stable growth is ahead and there is no basis for any large depreciation of the yuan."
The yuan may actually start appreciating in the near future, Liu Ligang, head of China economics at the Australia and New Zealand Banking Group, said as China's official Purchasing Managers' Index, an indicator of manufacturing activity, had beaten expectations in June.
"And as the situation in Europe turns more positive, we believe the yuan will gradually start to appreciate," Liu said. He forecast that the yuan will appreciate by 1.5 percent throughout the year.
The official PMI dipped slightly to 50.2 in June from 50.4 in May due to cyclical reasons, said Zhang Zhiwei, chief China economist at Nomura Holdings.
"The PMI has a seasonal bias, falling on average by 1.1 points between May and June. Therefore the slight drop in June this year is a positive sign."
Zhang Wenhua, the owner of a company in Nanjing that exports products to Europe, said the recent depreciation of the yuan has benefited his business as exports increased.
"I think the currency will keep depreciating gradually in the next few months so I will definitely continue to use dollars to settle deals with clients," he said.
Exporters in Guangdong province said that the recent yuan depreciation has not damaged their businesses.
"We don't feel too much pressure because we have fixed the price of orders with clients," said Zhang Peizhen, general manager of Chenghai Henglong Plastic Toys, which exported goods valued at about 8 million yuan ($1.3 million) last year.
"Traders may be under some pressure if the value of the yuan is going up. But we often fix the price of short-term orders," she said.
Chen Feng, deputy general manager of Guangdong Xinghui Auto Model, said the company had already introduced measures to avoid risks brought by yuan fluctuation.
"Besides exporting, we also import raw materials to balance any fluctuation," Chen said.