China loosened its handle on its yuan currency – but only more ambitious reforms will produce real convertibility over time. Reuters reporter Tara Joseph sits down with Scotiabank’s Senior Currency Strategist, Sacha Tihanyi.
A Quick Fix?
Tara Joseph: “Widening of the yuan trading band over the weekend, not good for people who were taking a night out, but now that it’s Monday (March 17)… what’s really the impact of this move?”
Sacha Tihanyi: “Right, so. I think the impact is probably a little bit muted somewhat due to the fact that the People’s Bank of China (PBOC) decided to fix dollar/CNY lower a little bit, kind of trying to stabilize the market after what could have been a very volatility-enhancing move. Generally I think Asian currencies were a little bit hesitant coming into the fix today, but once we saw a lower fix in dollar/CNY there was a little bit more relief.”
Pumping Life into the Yuan
Tara Joseph: “So as you mentioned it has weakened. And what now are you doing in terms of setting new targets? Do you have a new outlook for the yuan?”
Sacha Tihanyi: “So far, I’m not viewing this as a fundamental thing. This is more of a technical market trading type of change I would say, in line with PBOC’s reform agenda. I’m currently tracking 5.98 for end of the year, and fundamentally speaking, I still feel that’s justified though we still may see a little bit more volatility than we would have if the events of the past, like, day of even couple of weeks wouldn’t have happened.”
Tara Joseph: “Has anything really changed then? So, we have a widening of the band, your target for the year end hasn’t changed, it’s not really a major change of the system is it?”
Sacha Tihanyi: “Right, right. Well, we can expect more volatility and less policymaker intervention in the market if we take them at their word. However the one thing that could change is if the market participants begin to feel that the weakening in the renminbi is something that’s maybe here for a little bit and there may be a bit of a trend develop. We could see some hot money outflows from China. And that could impact my year-end forecast, and I would have to probably be a little less bullish on the renminbi, relatively to current levels.”
Let’s Put a Date on This Goal
Tara Joseph: “Going into this trend of yuan liberalization, this seems to be a small step, what we had over the weekend. But overall, nothing’s changed. Do you we’re still set for a major liberalization in the coming years. Some people were looking at 2015 as the year where we’d actually have a convertible currency?”
Sacha Tihanyi: “I think 2015 is probably a bit aggressive. I think the next major liberalizations on top of incremental capital account liberalizations will be to the interest rate markets – deposit rates, liberalization and refinements to trading in the fixed income securities and money markets in China. Those would be very crucial before we got a fully convertible exchange rate.”
Tara Joseph: “What year are you looking at then?”
Sacha Tihanyi: “I’d say we could be as far as three years away. You know, if the economic stability in China remains, and the reform agenda pushes forward at the current pace. So 2017, 2018 it’s quite possible.”