China Watch Blog

China Watch Blog has learnt that strong currencies are pushing up the cost of living for expatriate staff assigned to Asia, with the latest survey showing it is more expensive to live in Shenzhen and Guangzhou than in central London.

“The strengthening of Asian currencies is the dominant factor contributing to the region being more expensive for visitors than it was 12 months ago,” said Lee Quane of ECA International.

“In that period, the yuan has continued to strengthen while the yen has appreciated by almost 8percent against the US dollar. Many Western currencies, including sterling, the euro and Swiss franc, have weakened. As a result, people coming from these economies into Asia will notice a considerable difference in costs.”

Tokyo remains the most expensive location in Asia. Beijing and Shanghai are rapidly moving up the list, surpassing Singapore and Hong Kong.

Hong Kong is Greater China’s third most expensive city, sitting in 36th place globally, and also significantly ahead of central London. Within Asia, Hong Kong is the ninth most expensive location for international assignees, behind Beijing and Shanghai at Nos5 and 6.

Shenzhen and Guangzhou sit just behind Hong Kong at 10th and 11th place respectively in the Asian rankings. They are 55th and 56th in the world, compared with London, which is 62nd.

“A year ago the cost of purchasing goods and services in ECA’s cost of living basket was almost 10percent more expensive in London than when purchasing the same items in Guangzhou, and 15percent more than in Shenzhen,” Quane said.

“Now the cost of living in these cities for international assignees is approximately 1.5percent and 2 percent more, respectively, than in London where, unlike in the mainland, prices have increased at a much slower rate than the year before and sterling has depreciated against many major currencies.”

Globally, the rapid rise of Beijing and Shanghai has seen both cities overtake a number of locations in Australia, Brazil, Europe and the United States, including Rio de Janeiro (31st), Paris (34th) and Manhattan (40th).

Tokyo is the most expensive location both in Asia and the world and Japanese cities occupy the top four places in Asia.

Beijing’s move up the global rankings has also been dramatic: it is now the world’s 20th most expensive city, up from 48th place in the same survey last year.
While Hong Kong has remained in ninth in the Asia rankings, the city has climbed back up the global ranking following last year’s fall.

China Watch Blog has learnt that China’s efforts to make the yuan a global currency may be hampered by the lack of an independent monetary policy, fragile domestic financial markets and an “unbalanced” economy, a report edited by an adviser to the nation’s central bank warned.

“In the process of yuan internationalization, it will be hard to gain the confidence of the international community in the value of the yuan if monetary policy lacks sufficient independence,” according to the report, edited by Chen Yulu, from the International Monetary Institute of Renmin University in Beijing.

Chen is an academic adviser to the People’s Bank of China and president of the university, the Shanghai Daily reported.

China Watch Blog has learnt that the International Monetary Fund welcomed a decision by China’s central bank on April 14 to widen the yuan’s trading band against the dollar in a major step towards loosening currency controls.

The yuan is currently allowed to trade 0.5 percent on either side of a midpoint price set by the central bank every trading day.

The new rules — seen as a shift towards adopting more market-oriented reforms — will come into effect today and allow the currency to fluctuate by up to 1.0 percent either side, the bank said in a statement.

IMF chief Christine Lagarde described the move as an “important step.”

“This underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate,” Lagarde said in a statement.

Saturday’s announcement means that the yuan will be allowed to fluctuate further against the dollar.

The bank said the change was decided “in order to meet market demands… (and) enhance the flexibility of RMB (the renminbi, as the yuan is officially known) exchange rate in both directions.”

“In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfil its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable.”

The announcement came after China said Friday its economy grew at its slowest pace in nearly three years in the first three months of 2012, expanding by 8.1 percent

China Watch Blog has learnt that China will double the yuan’s trading band against the US dollar next week as the country improves the currency’s flexibility and its pricing mechanism.

The central bank economists said the long anticipated move signals an end for straight appreciation of the yuan, and is among the government’s recent financial reforms to improve the economic structure even at the cost of slower growth.

Dealers will be able to trade the yuan within 1 percent, up from the current 0.5 percent, on each side of the official central parity rate starting tomorrow, the People’s Bank of China said in a statement.

The Shanghai Daily reported that it is the first increase since 2007, when the band was widened from 0.3 percent.

“China’s current foreign exchange market is developing more maturely and trading entities are more capable of pricing independently and managing risks,” the statement said.

Qu Hongbin, a chief economist with HSBC, said the “symbolic move” of widening the trading band implies the trend of the yuan’s one-way appreciation has come to an end.

“The yuan will be ushered into an new era of truly two dimensional fluctuations,” Qu said.

China Watch Blog reports that China, which cut its expected economic growth rate this year to 7.5 percent, will intensify its currency regime reform, reflecting that the foreign exchange rate has possibly reached “equilibrium”, with little room for the renminbi to appreciate in the short term.

“In the Hong Kong market, the non-deliverable forwards (a type of futures contract) have started to fluctuate in both directions. And this tells us that the exchange rate of the renminbi has possibly reached equilibrium,” Premier Wen Jiabao was quoted as saying in a China Daily report.

“China will go on intensifying foreign exchange reform, especially to allow relatively wider, two-way fluctuation,” he said.

The yuan has gained 30 percent in real terms since 2005. But it dropped by 0.7 percent against the dollar this year after surging by 4.7 percent in 2011, while China’s exports have been hurt by the slackened global demand, especially because of the European debt crisis.

In February, China’s imports gained by 39.6 percent from a year earlier, and exports grew by 18.4 percent, causing a $31.5 billion trade deficit in February, the biggest since 1990. Experts said this will slow the pace of gains in the Chinese currency in the coming months.

“The premier’s remark on equilibrium means China will not allow its currency to rise by much in the short term, or say this year,” said Li Wei, an economist at Standard Chartered Shanghai.

“And it also shows the nation is not optimistic about China’s economy and the exports dragged down by the European debt crisis,” he added.

China Watch Blog has learnt that Chinese lenders extended fewer new yuan loans than expected for a second consecutive month in February. sparking expectations of further monetary-easing policies from the authorities to guarantee enough liquidity for the real economy, including manufacturing and services.

The China Daily reported that banks lent out 710.7 billion yuan ($112.5 billion) last month, below market expectations of 750 billion yuan, according to data released by the People’s Bank of China, the central bank, on Friday.

M2, a broad measure of money supply that covers cash in circulation and all deposits, grew by 13 percent year-on-year by the end of February, 0.6 of a percentage point higher than a month earlier, but below the government’s 14 percent target for the year.

In January, Chinese lenders lent 738.1 billion yuan, scattering market expectations of 1 trillion yuan. Meanwhile, M2 hit the lowest level since June 2001.

“The lower-than-expected amount of new yuan loans last month was probably caused by the fact that banks have become more prudent in lending, and lending demand from companies declined as economy further slowed,” said Wu Xiaoling, a former deputy governor of the PBOC.

Wu added that the lending of some banks, especially those joint-stock commercial banks, might have been restrained by a deposit-to-loan ratio of 75 percent.

China Watch Blog reports that a Shanghai government official has dismissed suggestions that the city will compete against Hong Kong as a global yuan hub, noting instead each city’s distinct strengths.

The Standard quoted an official as making the comments a day after the National Development and Reform Commission and the Shanghai government outlined a joint plan to make Shanghai an international center for yuan trading.

Fang Xinghai, head of Shanghai financial services office, said each city possesses “unique advantages.”

Fang added: “Shanghai market is larger in size and has more experience in serving the China market. Hong Kong has looser regulations. It is highly market-oriented and has a faster pace of innovation.”

Fang said further internationalization of the currency is essential to building an international financial hub.

“If we miss the opportunity to internationalize the yuan, the financial hub will be at risk.”

Fang noted that central government made the decision with regard to the plan and related policies would be implemented.

Ronald Aculli, chairman of Hong Kong Exchanges and Clearing (0388), concurred with Fang, saying Shanghai would not pose a challenge to Hong Kong.

He urged the SAR to seize the chance to consolidate its status as the offshore yuan center for the international market.

But an economist said Hong Kong has no choice but to adapt to the new reality.

“This will likely make offshore renminbi centers less relevant in the medium term and challenge Hong Kong’s status as China’s sole international financial center,” said Liu Ligang, head of greater China Economics at ANZ Research.

“Hong Kong will need to re-invent itself to meet the challenges posed by Shanghai once China lifts capital controls.”

China Watch Blog has learnt that yuan loans and dim sum bond sales in Hong Kong will expand rapidly this year as appreciation of the currency is expected to slow and Beijing relaxes investment rules, the city’s financial services secretary said.

“Yuan loan growth will be fast,” Professor Chan Ka-keung said at the annual Asian Financial Forum in Hong Kong. The market for so-called dim sum bonds would also expand “in all dimensions”, with gains in issuers and amount, according to a Bloomberg report.

Mainland companies are increasingly seeking to borrow in Hong Kong as unsettled equity markets deter stock sales. The yuan is expected to see the slowest growth since 2009 as shrinking economic growth curbs demand.

Sales of dim sum bonds, denominated in yuan, quadrupled to a record US$23.7 billion last year, exceeding the US$16.6 billion raised using Hong Kong dollar debt. The number of dim sum bond issuers jumped to 87 from 19 in 2010. Sales may rise to US$47.5 billion this year, according to analysts.

Vice-Premier Li Keqiang pledged in August to allow companies to borrow as much as 50 billion yuan (HK$61.2 billion) each year through bond sales in the city. The government has also relaxed rules to allow direct investments denominated in the currency.

The yuan will gain 2.3 per cent to 6.15 per dollar, according to Andy Ji, a Singapore-based strategist at the Commonwealth Bank of Australia.

China Watch Blog has learnt that Hong Kong will help London develop as the next offshore yuan trading centre, shrugging off traditional competition between the two cities as part of a broader plan to boost international usage of the currency.

The tie-up with the City of London, including extensions of currency trading hours, is the first such agreement with another financial centre and signals Hong Kong’s intention to deepen its involvement in building the yuan into a truly global currency.

Britain’s finance minister, Chancellor of the Exchequer George Osborne, played down suggestions the move would hurt Hong Kong as a leading offshore yuan trading centre, the SCMP reported. Osborne told a Hong Kong government seminar yesterday that the plan was to “establish London as a new hub for the renminbi market as a complement to Hong Kong”.

Osborne will meet Vice-Premier Wang Qishan in Beijing to discuss details about how London will develop as a yuan trading centre and tap business in Asia. Britain, which was hard hit by the global financial crisis, saw its exports to China surge 20 per cent last year.

“We have got to do more if we are to be the home of Asian investment in Europe. The British government needs to roll up its sleeves and make it happen,” Osborne said, adding that he wanted more Asian trade and tourists in Britain.

The chief executive of the Hong Kong Monetary Authority, Norman Chan Tak-lam, said that by establishing appropriate links with Hong Kong’s offshore yuan platform, banks in different parts of the world would be able to provide a comprehensive range of yuan banking and financial services to meet the rapidly increasing demand of customers.

China Watch Blog has learnt that China’s currency, the Renminbi, or the yuan, surged 148 basis points to hit a record high of 6.3009 against the US dollar on Friday, the last trading day of 2011.

Friday’s revaluation in the yuan’s central parity rate sealed the Chinese currency’s appreciation against the greenback at 4.86 percent this year, according to the China Foreign Exchange Trading System.

Calculated in terms of the central parity rate, the yuan has strengthened about 24 percent against the US dollar since China replaced its decade-long link between the yuan and the US dollar and switched to a basket of unspecified currencies, the China Daily reported.

The yuan remained strong in 2011 even though a weakening for 12 consecutive trading days in November had once triggered concerns that the Chinese currency might head toward a devaluation cycle.