China clings to strong yuan despite export slowdown

* Concern that weaker yuan would accelerate capital outflows


* Yuan kept stable against strong dollar as growth slows


* Against many other currencies, yuan at record highs


* China exports unexpectedly tumbled 15 pct in March


By Koh Gui Qing


BEIJING, April 14 (Reuters) - As China's export engine sputters, it is avoiding the seemingly simple fix of letting its managed currency drift lower to improve competitiveness, constrained by the threat of faster capital withdrawal as its economy slows.


The yuan has struck record highs this year against the euro , the Indonesian rupiah, and the Australian dollar, a surge that coincided with a shock 15 percent fall in Chinese exports in March.


According to Goldman Sachs, its yuan trade-weighted index has jumped 13 percent since June last year, and the currency's strength is a key reason for China's disappointing export sales.


But authorities are keeping the yuan stable against a strong dollar, supporting it even as it tears higher against some other currencies.


The reluctance to weaken the currency comes after China's capital and financial account recorded a deficit of $91.2 billion in the last quarter of last year, and the country's foreign exchange regulator, the State Administration of Foreign Exchange (SAFE), warned that capital flows would be volatile this year.


A weaker yuan could accelerate capital outflows, taking a further toll on economic growth, which is already expected to grind to a 25-year low this year, and SAFE has also indicated that the exchange rate could be fixed to counter shocks to the economy.


First-quarter GDP figures on Wednesday are likely to confirm China's "new normal" of slower growth, but policy options to help the economy are restricted by Beijing's desire to avoid the kind of asset bubbles that followed its stimulus measures in response to the global financial crisis. It also wants to press on with reforms that will eventually make theeconomy more efficient, but could in the short term make things difficult for the bloated state sector.








Eddie Cheung, a strategist at Standard Chartered in Hong Kong, said China had in recent months increased its efforts to support its currency, in part to wrongfoot investors who were betting on a persistently weak yuan.


"All central banks, not just the People's Bank of China, are worried when the market gets too one-sided, so they want to smooth out the volatility," Cheung said.


And China's plans to internationalise its currency by lobbying for its inclusion in the International Monetary Fund's (IMF) special drawing rights (SDR) basket may also have played a part in the yuan's recent strength, Cheung said.


The SDR, an international reserve asset, currently comprises dollars, yen, pounds and euros. The basket is up for review in May, and Chinese Premier Li Keqiang was reported by state news agency Xinhua as saying last month that he had asked the IMF to include the yuan in the SDR.


As the yuan's value has been a bone of contention with trading partners, especially the United States, which has the biggest say at the IMF, analysts say keeping the yuan steady against the dollar could be an important component in China's SDR bid.


To be sure, some economists are sceptical that the yuan's strength has been crimping Chinese trade, especially after accounting for distortions to the data due to the Lunar New Year holiday.


"I certainly don't rule out the idea that it could have an impact, but I just don't see it in the data," said Mark Williams at Capital Economics in London.


Chinese shipments were up 4.7 percent between January and March, so China appears to be doing well relative to Taiwan and South Korea, where exports fell 4.2 percent and 2.8 percent, respectively, Williams said.


And not all exporters are feeling the pinch. One exporter in Changzhou, south China, which sells clothes and machinery to Europe, the Middle East and Southeast Asia, said the strong yuan had not yet hurt sales.


"For now, the prices of our export goods remain unchanged," said a company official who declined to be named, though that was partly thanks to the company's currency hedges.

"But it will of course affect our exports ultimately," he added. (Additional reporting by Beijing Newsoom, J.R. Wu in Taipei and Yoo Choonsik in Seoul; Editing by Will Waterman)


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14 Apr 2015

By Koh Gui Qing