Shifts in Market Sentiment Led to Recent Yuan Fluctuations, Financial Academic Says
Xu Yanyan
DATE:  Jul 16 2018
/ SOURCE:  Yicai
Shifts in Market Sentiment Led to Recent Yuan Fluctuations, Financial Academic Says Shifts in Market Sentiment Led to Recent Yuan Fluctuations, Financial Academic Says

(Yicai Global) July 16 -- Changing market sentiments in the foreign exchange market have played a key role in the recent fluctuations affecting the yuan's value, a leading financial academic told Yicai Global in an exclusive interview. The onshore yuan fell 4 percent overall against the dollar between June 14 and July 12.

"This round of rapid falls in the yuan's exchange rate was driven by the market without the intervention by the central bank," Guan Tao, senior researcher at China Finance 40 Forum and a former Director at State Administration of Foreign Exchange's Payments Department, told Yicai Global. "Looking deeper, the adjustment was attributable to a shift in market sentiments amid various uncertainties in both the internal and external environment."

Although the China-US trade issues impacted short-term market trends, the definitive factor will be the country's economic development in the medium and long- term, said Guan.

He believes that China stands every chance of tackling the trade frictions thanks to its huge domestic market and its economy, which is resilient enough to address challenges.

There is no need for excessive concern in the market over the recent fluctuations in the RMB against the US dollar, he said, adding that the market-oriented drive can serve to automatically stabilize the exchange rate as long as the expectations are differentiated. In the longer haul, a strong economy paves the way for a strong currency. Below is a translated transcript of the interview's highlights.

Limited Impact of Trade Tensions

Yicai Global: The exchange rate and stock markets have become volatile due to the recent frictions between China and the US over trade. How do you their influence on Chinese development?

Guan: It may cause some negative sentiments on the financial market in the short term, yet it will not change the fundamentals of China's financial market development in the long run. Hence, overestimating its impact is unnecessary. Economic frictions are inevitable between China, an emerging major country and the US, an established major country. We must treat them with a clear mind, just as we did during times of economic friction between the US and Germany and Japan over the past decades.

Secondly, the market does not need to fear unknown. Historically, the result may not be as pessimistic as we expected. The latest example is the Brexit referendum at the end of June in 2016 and the public feared the negative impact on the British market; therefore, the fear resulted in violent volatility in the foreign exchange market and the sharp decline of the pound's exchange rate. However, it turned out later that the turmoil was the result of the concentrated release of negative emotions driven by the referendum. Rationally, the future British economic trend cannot be thoroughly changed by one event. And if we look back, we find this to be true.

Thirdly, learning from the experience of Japan, the country had argued over trade with the US for over 30 years which turned white-hot in the mid-1980s. However, over that 30-year period, Japan witnessed a stable economic growth and fluctuations in the stock market and foreign currency market in line with their own rules.

Therefore, comprehensively, the trade may trigger a big problem at some point that has an impact on the exchange rate and stock market in the short-term while the country's development still decides future trend for the medium and long-term.

Yicai Global: According to the latest statement from China's General Administration of Customs, China has been seeing an increasingly narrowed trade surplus since the third quarter of 2016, and it will become more balanced in the future. From the aspect of international payments, how do you consider trade between China and the US?

Guan: In terms of simply calculating the economy, the US does not suffer losses although China enjoys a trade surplus. The latest research from Deutsche Bank showed that in terms of total sales volume, including commodity services local production and sales of US companies in China and production and sales to third parties by these companies through China, the US' trade deficit in China was USD30 billion in 2015 and the trade surplus was USD7 billion and USD20 billion in 2016 and 2017, respectively. If we can avoid these trade frictions, the number will reach over USD100 billion by 2020.

Besides, the post-Bretton Woods Institution agreement era refers to a situation where "I buy your goods and you purchase my national debts." When the US imports high-quality and inexpensive commodities from other countries, other countries invest most of their money earned through trading American national debts. Why should the US suffer losses?

The US makes an excuse, saying that China has taken away Americans' job opportunities through its manufacturing industry. In fact, employment in the American manufacturing industry only accounts for around 10 percent of non-farm payrolls. Ten years on from the financial crisis in 2008, the American non-farm payrolls have increased which mainly represents increasing employment in the service industry. As for China, we have been creating job opportunities through the tertiary industry as part of economic transition during these years as well.

The US initially triggers trade frictions. Foreign researchers have noted that trade frictions are forcibly imposed on China by the US.

Yicai Global: What is the impact of trade frictions on the US?

Guan: In fact, the US government's current approach is short-sighted and is tantamount to abandoning a fast-growing market like China. It is damaging to the long-term interests of US companies.

If trade frictions continue, and even if China does not respond, the US will suffer as well. For example, the tariffs imposed by the US on imports are ultimately passed on to US consumers. If China fires back, then the damage will be even more serious for both sides.

In addition, the trade frictions between China and the US today are very different from those between Japan and the US decades ago. At that time, the international division of labor was not as complicated as it is now. Today, global value chains and industrial chains are interconnected and indivisible. More than USD20 billion, or about 59 percent, of the so-called USD34 billion list of taxable products released by the US government is made by foreign-owned enterprises in China. Among them, US companies make up a considerable proportion.

Yicai Global: Do trade frictions have a certain impact on China's balance of payments?

Guan: In the short-term, they may have a certain impact on China's total import and export volume, but they will have little influence on the balance of imports and exports. In exchange rate and international trade theories, there is a 'J-Curve Effect,' that is, after the exchange rate level changes, its impact on the trade balance will have a time-lag. This is because the creation of trade networks has reduced costs, which means it takes time for trade networks to change and for new business links to be established. Therefore, China's trade surplus with the US increased by 10 percent in the past five months compared with the same period last year, according to US statistics.

Many people think one-sidedly that the reduction of the trade surplus will have a negative effect on the economy, but it is not necessarily a bad thing to reduce the trade surplus by increasing imports rather than cutting exports, thereby improving the trade imbalance. All imports correspond to domestic investment or demand. In other words, although the role of external demand on economic growth has declined, the expansion of domestic demand stimulated by investment and consumption can play an instrumental role.

Editor: William Clegg

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Keywords:   Central Bank,Market Analysis,U.S.-China Trade Dispute,Currency Market,Balance of International Payment