HEARD ON THE STREET
FEBRUARY 13, 2012, 4:33 A.M. ET
Staying Current on China's Imbalance
By TOM ORLIK
The trade imbalance that characterized China's economic relations with the rest of the world for the best part of the past decade has all but disappeared.
China's current-account surplus for 2011 shrank to $201.1 billion, from
$305.4 billion in 2010. More important, as a ratio of gross domestic product,
the current-account surplus fell to about 2.7%. That's close to a decade low and
below the 4% threshold that suggests an exchange rate out of whack with
equilibrium.
The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.
But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued.
Forecasts for yuan appreciation against the dollar in the year ahead are now down to 2% to 3%—compared with gains of 5.1% in 2011. For investors, the implications of that slowdown are far reaching. Also set to suffer if yuan gains slow: other regional currencies like the Singapore dollar and Malaysian ringgit that track their big neighbor.
Hong Kong will also feel the heat. Investors in mainland companies listed in Hong Kong are used to seeing their earnings juiced by a favorable exchange rate. That benefit could be reduced.
Investors in offshore yuan bonds—also known as dim sum bonds—accepted lower yields for much of last year because of the upside from yuan appreciation. That argument no longer looks so compelling. In the fourth quarter of 2011 issuance of dim sum bonds fell by 26% quarter-to-quarter, according to Dealogic.
In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.
But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued.
Forecasts for yuan appreciation against the dollar in the year ahead are now down to 2% to 3%—compared with gains of 5.1% in 2011. For investors, the implications of that slowdown are far reaching. Also set to suffer if yuan gains slow: other regional currencies like the Singapore dollar and Malaysian ringgit that track their big neighbor.
Hong Kong will also feel the heat. Investors in mainland companies listed in Hong Kong are used to seeing their earnings juiced by a favorable exchange rate. That benefit could be reduced.
Investors in offshore yuan bonds—also known as dim sum bonds—accepted lower yields for much of last year because of the upside from yuan appreciation. That argument no longer looks so compelling. In the fourth quarter of 2011 issuance of dim sum bonds fell by 26% quarter-to-quarter, according to Dealogic.
In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
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