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| Version 1 | Version 2 |
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| In China, Shaking Up Currency’s Strength | In China, Shaking Up Currency’s Strength |
| (6 months later) | |
| HONG KONG — One of the surest bets on China is starting to look a bit shaky. | |
| Every business day for the last nine years, at 9 a.m., government workers in the blandly named Building No. 30 in Shanghai’s Pudong financial district have published what their country’s currency will be worth that day, when compared with the United States dollar. | Every business day for the last nine years, at 9 a.m., government workers in the blandly named Building No. 30 in Shanghai’s Pudong financial district have published what their country’s currency will be worth that day, when compared with the United States dollar. |
| More often than not, the staff of the China Foreign Exchange Trade System has assigned a value to the currency, the renminbi, slightly stronger than it had finished the previous day. Thanks to the guiding hand of the Chinese state, the renminbi today is about 25 percent stronger than it was in July 2005, when China scrapped the currency’s fixed peg to the dollar in favor of a steady, crawling appreciation. | More often than not, the staff of the China Foreign Exchange Trade System has assigned a value to the currency, the renminbi, slightly stronger than it had finished the previous day. Thanks to the guiding hand of the Chinese state, the renminbi today is about 25 percent stronger than it was in July 2005, when China scrapped the currency’s fixed peg to the dollar in favor of a steady, crawling appreciation. |
| But recent developments suggest such strengthening is no longer the certainty it once appeared to be. So far this year, the renminbi has weakened 1.6 percent against the dollar. And on Saturday, the central bank, the People’s Bank of China, said that beginning on Monday, it would allow the currency to climb or fall as much as 2 percent per day against the dollar, compared with 1 percent previously. | But recent developments suggest such strengthening is no longer the certainty it once appeared to be. So far this year, the renminbi has weakened 1.6 percent against the dollar. And on Saturday, the central bank, the People’s Bank of China, said that beginning on Monday, it would allow the currency to climb or fall as much as 2 percent per day against the dollar, compared with 1 percent previously. |
| Widening the trading band “will further drive away speculators betting on a one-way appreciation of the Chinese yuan” — another name for the renminbi — “thanks to the possible bigger and more frequent exchange rate fluctuations,” Tan Yaling, president of the China Forex Investment Research Institute, told Xinhua, the state-run news agency, on Sunday. | Widening the trading band “will further drive away speculators betting on a one-way appreciation of the Chinese yuan” — another name for the renminbi — “thanks to the possible bigger and more frequent exchange rate fluctuations,” Tan Yaling, president of the China Forex Investment Research Institute, told Xinhua, the state-run news agency, on Sunday. |
| This newfound volatility and uncertainty over the currency is just one area where, despite recent economic data suggesting that growth is decelerating to its slowest pace in over a decade, China is pushing ahead with a campaign of wide-ranging financial overhauls. If carried out, they are likely to redefine the nation’s state-driven growth model and to reverberate in economies far beyond China’s borders. | This newfound volatility and uncertainty over the currency is just one area where, despite recent economic data suggesting that growth is decelerating to its slowest pace in over a decade, China is pushing ahead with a campaign of wide-ranging financial overhauls. If carried out, they are likely to redefine the nation’s state-driven growth model and to reverberate in economies far beyond China’s borders. |
| A risk for companies and countries that do business with China is not that Beijing will balk at restructuring its economy if growth slows beyond a certain point; it is that policy makers will stay the course. | A risk for companies and countries that do business with China is not that Beijing will balk at restructuring its economy if growth slows beyond a certain point; it is that policy makers will stay the course. |
| Over the years, China’s investors and trade partners have come to rely on what amounts to a “Beijing put,” an option that provides assurance that a minimum level of growth will be attained. When the country looked set to fall short, the government would intervene to prime the pumps — freeing up credit, introducing subsidies and otherwise ensuring that China avoided any real economic pain and remained on track as the world’s fastest-growing major economy. | Over the years, China’s investors and trade partners have come to rely on what amounts to a “Beijing put,” an option that provides assurance that a minimum level of growth will be attained. When the country looked set to fall short, the government would intervene to prime the pumps — freeing up credit, introducing subsidies and otherwise ensuring that China avoided any real economic pain and remained on track as the world’s fastest-growing major economy. |
| Yet in the face of apparently slowing growth, this implicit guarantee is showing signs of fraying. Markets around the world are growing worried, from Australian iron ore miners to the luxury fashion houses of Europe to American scrap exporters. | Yet in the face of apparently slowing growth, this implicit guarantee is showing signs of fraying. Markets around the world are growing worried, from Australian iron ore miners to the luxury fashion houses of Europe to American scrap exporters. |
| Take copper, where global prices have fallen sharply in recent weeks. This is partly the result of concerns that growth is slowing in China, which accounts for more than 40 percent of global consumption of the metal. But the falling prices represent another, bigger fear — one that focuses on the role copper plays in China’s huge shadow finance sector and the realization that Beijing will not always be there with a bailout. | Take copper, where global prices have fallen sharply in recent weeks. This is partly the result of concerns that growth is slowing in China, which accounts for more than 40 percent of global consumption of the metal. But the falling prices represent another, bigger fear — one that focuses on the role copper plays in China’s huge shadow finance sector and the realization that Beijing will not always be there with a bailout. |
| Many Chinese companies and investors buy copper they have no intention of using. Instead, companies that otherwise have difficulty securing traditional loans will purchase copper from overseas suppliers by using letters of credit issued by banks, which only require a deposit of around 15 percent of the value of the goods being purchased, according to analysts. | Many Chinese companies and investors buy copper they have no intention of using. Instead, companies that otherwise have difficulty securing traditional loans will purchase copper from overseas suppliers by using letters of credit issued by banks, which only require a deposit of around 15 percent of the value of the goods being purchased, according to analysts. |
| The Chinese importer then parks the shipment of copper in a duty-free warehouse and uses it as collateral to secure a bank loan at favorable rates, the proceeds from which are used to make higher-yielding investments. When the letter of credit comes due, usually in three to six months, the importer cashes out of the financial investment or sells the copper. | The Chinese importer then parks the shipment of copper in a duty-free warehouse and uses it as collateral to secure a bank loan at favorable rates, the proceeds from which are used to make higher-yielding investments. When the letter of credit comes due, usually in three to six months, the importer cashes out of the financial investment or sells the copper. |
| This month, a small producer of solar panels based in Shanghai failed to pay the interest on a bond worth 1 billion renminbi, or $163 million. It was the first default in China’s onshore corporate bond market in recent history, and it sent shock waves through global copper markets. | This month, a small producer of solar panels based in Shanghai failed to pay the interest on a bond worth 1 billion renminbi, or $163 million. It was the first default in China’s onshore corporate bond market in recent history, and it sent shock waves through global copper markets. |
| Investors are worried that Chinese buyers who imported copper purely for financing purposes could be forced to sell, and prices of the metal have plummeted on fears that hundreds of thousands of tons of copper could begin to flood global markets as a result. As of Friday, benchmark three-month copper contracts closed at $6,469 per ton on the London Metal Exchange, down more than 8 percent from March 6, the day before the panel maker, the Shanghai Chaori Solar Energy Science and Technology Company, defaulted. Chaori’s default “was probably the trigger” for the slide in global copper prices, said Helen Lau, a senior metals and mining analyst at UOB Kay Hian in Hong Kong. | Investors are worried that Chinese buyers who imported copper purely for financing purposes could be forced to sell, and prices of the metal have plummeted on fears that hundreds of thousands of tons of copper could begin to flood global markets as a result. As of Friday, benchmark three-month copper contracts closed at $6,469 per ton on the London Metal Exchange, down more than 8 percent from March 6, the day before the panel maker, the Shanghai Chaori Solar Energy Science and Technology Company, defaulted. Chaori’s default “was probably the trigger” for the slide in global copper prices, said Helen Lau, a senior metals and mining analyst at UOB Kay Hian in Hong Kong. |
| “Before, people still had wishful thinking that the government would bail out whatever, but now?” Ms. Lau said. “One default can lead to another. People are really scared.” | “Before, people still had wishful thinking that the government would bail out whatever, but now?” Ms. Lau said. “One default can lead to another. People are really scared.” |
| So far, the Chinese leadership is showing no signs that it shares those fears. Indeed, analysts have said that allowing a struggling company to default instead of rushing in with a government bailout is a necessary form of near-term pain if China’s 8.5 trillion renminbi corporate bond market is to mature and develop over the long term. | So far, the Chinese leadership is showing no signs that it shares those fears. Indeed, analysts have said that allowing a struggling company to default instead of rushing in with a government bailout is a necessary form of near-term pain if China’s 8.5 trillion renminbi corporate bond market is to mature and develop over the long term. |
| “I’m afraid sometimes in certain individual cases such defaults are hardly avoidable,” Li Keqiang, China’s premier, told reporters on Thursday in response to a question about the country’s debt situation. He said the government’s response should be “to step up monitoring” in order to “ensure that there will be no regional or systemic financial risks.” | “I’m afraid sometimes in certain individual cases such defaults are hardly avoidable,” Li Keqiang, China’s premier, told reporters on Thursday in response to a question about the country’s debt situation. He said the government’s response should be “to step up monitoring” in order to “ensure that there will be no regional or systemic financial risks.” |
| “We don’t want today’s steppingstone to become tomorrow’s stumbling block,” Mr. Li said. | “We don’t want today’s steppingstone to become tomorrow’s stumbling block,” Mr. Li said. |
| Still, analysts question how much economic pain Beijing is willing to endure for the sake of overhauls to its financial system. At least four investment bank economists cut their G.D.P. growth forecasts for China on Thursday and Friday, citing weak data on investment, retail sales and property sales. | Still, analysts question how much economic pain Beijing is willing to endure for the sake of overhauls to its financial system. At least four investment bank economists cut their G.D.P. growth forecasts for China on Thursday and Friday, citing weak data on investment, retail sales and property sales. |
| Analysts said letting the currency trade more freely was a step that could help the country to liberalize interest rates, which leaders have said is another major goal that could be reached as early as next year. | Analysts said letting the currency trade more freely was a step that could help the country to liberalize interest rates, which leaders have said is another major goal that could be reached as early as next year. |
| Still, policy makers made it clear that by stepping back from the market, the government was not stepping out of the picture entirely. | Still, policy makers made it clear that by stepping back from the market, the government was not stepping out of the picture entirely. |
| “Market participants should view fluctuations in the exchange rate rationally and respond proactively,” China’s central bank said in a statement posted on its website on Saturday. “Of course, if the exchange rate sees large or abnormal swings, the central bank will carry out the necessary adjustments and supervision in order to protect the normal floating exchange rate of the renminbi.” | “Market participants should view fluctuations in the exchange rate rationally and respond proactively,” China’s central bank said in a statement posted on its website on Saturday. “Of course, if the exchange rate sees large or abnormal swings, the central bank will carry out the necessary adjustments and supervision in order to protect the normal floating exchange rate of the renminbi.” |