China currency appreciation comes to an end

The currency appreciation in China is nearing to an end, if not yet concluded, Essence Securities' fixed-income senior analyst Jing Xiaoda in an emailed letter to the reporter.

In the short term, the shortage of the dollar is perhaps the major incentive for declines of the funds outstanding for foreign exchange and the outflow of capital recently, wrote Jing.

Capital outflow

The funds outstanding for foreign exchange expanded its fall in December to 100.33 billion yuan, the third consecutive monthly decline since October, according to data published by the central bank on January 14.

Growing stain in dollar supply could be majorly blamed in the short term, said Jing.

The TED spread, or the difference between the interest rates on interbank loans and on short-term U.S. government debt, expanded to 50 basis points from 10 basis, nearing to the record made at the depth of euro debt crisis in the second quarter in 2010, he explained.

Capital outflows in Brazil, India and China have been obvious in the same period, and currencies in these countries, together with Russia's Ruble, have depreciated substantially by as much as 20 percent against the dollar in the end of 2011, comparing with those in early August.

A delay in cross-border trading settlement and advanced redemption of the dollar debt, which came in bundles at the turn of the year, will marginally reinforce the outflow of capital against a backdrop of depreciating yuan and the expectation of a yuan depreciation, said Jing.

Ying also cited factors euro debt crisis and global finance as predicting that the capital outflow will be eased somehow.

With more injection to the European banking systems by the European central bank and given the scale of the European Financial Stability Facility, as well as high risk premium that could reflect pessimistic expectations, January's debt peak will not necessarily deal a further blow to premiums in the global market, he explained.

On the other hand, trends of the TED spread, exchange rate in emerging market and gold prices have averted, which would slow the capital outflow in China if it continues.

Yuan's appreciation

This round of yuan's appreciation may have come to an end, wrote Jing in a report, and the amount of funds outstanding for foreign exchange may also experience a systematically decline as trade surplus stops declining and the yuan stops rising quickly.

Expectations of yuan's appreciation began to drop from September 2011, as shown in the NDF (deliverable forward) market, is the first of such since 2004; and the yuan's quick devaltion during the end of November and the mid-December was also the first since 2004, according to Yi.

This round of appreciation may have not yet ended, but is probably nearing to an end, he said.