The Unintended Consequence Of The Soaring Dollar

It seems the S&P 500's recent strength is somehow comforted by the fact that the USD is riding high on its cleanest dirty shirt meme at 34 month highs but unfortunately for the Chinese (and their practical peg to the USD), things are a little less fun than in the old mercantilist manipulation days. The implicit benefit that dollar flows appear to be getting (via the wealth effect in the US stock market) is not there in China (lower equity ownership); in fact, the rising Yuan is drastically hurting them as despite export orders remaining in growth mode, the China Daily reports that "most exporters in the delta region have told us that the rising yuan value has led to a big profit decline." Of course, the exporters are calling for a weaker Yuan but as the nation struggles with an exploding shadow banking system, bubbles in real estate and credit, and inflation concerns it knows that any implicit effort to weaken the CNY will create a surge in capital inflows and fuel further imbalances. China remains in the middle of the 'currency war'-driven inflation rock and 'sagging growth' hard place; and with two 91-day bill issues in the last week (in addition to repo)  the clear signal (masked by export data fudges) is that China is much more worried about inflation than it is letting on (and has little ability to manage hot money inflows).


Via China Daily,

The rising value of the yuan has made it difficult for exporters in the Pearl River Delta region to make money, even though they saw an increase in orders in April, an industrial survey said on Tuesday.

 

"Exports from the delta region increased a lot last month, but exporters have found it hard to make profits given the yuan's appreciation," said Xiao Feng, deputy general manager of One Touch Business Services Co, a Chinese provider of foreign-trade services.

 

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"However, most exporters in the delta region have told us that the rising yuan value has led to a big profit decline," said Xiao, without elaborating on how much profits have declined.

 

The People's Bank of China last week set the daily reference rate of the yuan against the dollar at 6.1980, the highest in 19 years. Indicators show that capital flows into China have accelerated in recent months.

 

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"Some companies have borrowed in dollars, converted them into yuan and bought into yuan-denominated assets, waiting for the Chinese currency to strengthen further. The inflows have brought about pressures for the yuan exchange," Liu said.

 

With the introduction of measures to crack down on hot money inflows, there is a possibility of a weak yuan exchange rate in the near future

 

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Zhang Zhenghu, deputy general manager of the overseas sales branch of Gree Electric Appliances, said the company had to increase the price of its products early this year because of the yuan appreciation

 

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"Yuan appreciation burdens most Chinese exporters heavily. We had to increase the price to make a sustainable business profit in the overseas market," Zhang said.

 

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