Fortunes of yuan hostage to trade data

The forecasts follow a three-month period since the last poll was published in which the yuan has gained about 1.3 percent to the dollar,leaving it slightly stronger than analysts anticipated despite deteriorating economic data and easier macro policy settings.

Strengthening of the data next year,particularly on the trade account – sagging thanks to slumping demand from the debt-wracked European Union,hitherto China’s biggest foreign customer – will be needed to support any appreciation of the yuan,analysts say.

The recent weakness of China’s exports and an increasing policy focus on support for exports has led us to maintain our forecast of no change in USD/CNY over the next six months,despite our FX team’s projection of a dollar depreciation,strategists at Goldman Sachs said in a note to clients.

We expect the yuan to start to appreciate modestly against the dollar again towards the middle of next year (at an annualised rate of 2 percent) when external demand is expected to become firmer and be more supportive of China’s exports,they added.

Goldman Sachs forecasts the yuan at 6.28 to the dollar in 12 months’ time after dipping as low as 6.34 by the end of 2012.

For a full range of forecasts gathered in the poll,click on the code in brackets.

China’s economy has slowed for six successive quarters and analysts expect GDP data due later this month to confirm that the slide continued into a seventh.

The latest Reuters poll forecasts that China’s annual growth rate eased to 7.4 percent in the third quarter. The risk of a deeper drop could even put the government’s official 7.5 percent full year forecast in jeopardy.

The economy is already on track to chalk up its slowest full year of growth since 1999.

A sharp slide in the growth rate of exports had been a key drag on the broad economy. Exports generated 31 percent of gross domestic product in 2011,according to World Bank data,and supported an estimated 200 million jobs.

EXTERNAL SLOWDOWN UNDERESTIMATED

Chen Yulu,a professor at China’s Renmin University and an academic adviser to the monetary policy committee of the People’s Bank of China (PBOC),told reporters late last month that Beijing had severely underestimated the extent of the global economic slowdown and that further monetary policy easing hinged on developments in the external sector.

Trade flows have a pivotal role in China’s policy making given the controls Beijing maintains on its capital account which stops the yuan being freely convertible,despite the government’s encouragement for the currency’s steady rise in use for cross-border trade settlement.

Chinese exporters exchange foreign currency they receive for yuan from the PBOC,which in turn controls the onshore value of the yuan through the setting of a daily rate from which it is allowed to deviate by 1 percent in either direction in the course of a trading day.

When it becomes clear that the economy has rebounded from its low point,the yuan should begin to strengthen as exporters start to convert more of the dollars they earn,according to Dariusz Kowalczyk,senior economist and strategist for non-Japan Asia at Credit Agricole-CIB in Hong Kong.

The process may have already begun,Kowalczyk said in a client note,forecasting a rise in demand for yuan in the fourth quarter of 2012 to drive it to 6.30 by year-end.

That should set the yuan on course for a 2 percent gain through 2013,taking it to 6.17 to the dollar,he said.

Chinese banks sold more foreign currency than they bought for clients in August,leading to a net sale of $6.3 billion in foreign exchange in over-the-counter transactions,figures from the State Administration of Foreign Exchange show.