He Weisheng, Asia FX and rates strategist, Citi:
I don't believe China's receipts of US dollars from exports are not enough to cover the import payments on a structural basis. However, unlike before, Chinese corporations are now showing a tendency to withhold their dollar proceeds rather than immediately converting them into renminbi.
This creates pressure on the Chinese currency to appreciate. Moreover, in the past decade, companies have accumulated large short US dollar positions from the currency mismatch on their balance sheets. US dollar proceeds will be used to cover those positions too. Corporations' dollar deposits have risen far more quickly than their dollar loans this year, causing the funding rate onshore to ease and the FX swap points to move higher. In the past china's private sector has run a large short US dollar position (compared to an even larger long position in the public sector). This short position should shrink going forward.
Dariusz Kowalczyk, senior economist, Asia ex-Japan, Credit Agricole CIB:
The unthinkable has happened: the renminbi spot saw a meaningful depreciation year-to-date, by 1.3% -- its biggest fall since 1994. In mid-July, it is trading at close to Rmb6.379, versus below Rmb6.3 at the end of 2011. It is clear the seven-year rising trend has been halted.
The are a number of reasons behind the recent depreciation: 1. A policy shift to support exporters. 2. Disappearance of expectations of further appreciation. 3. Arbitrage between onshore and offshore markets. 4. Outflow of capital on weaker growth expectations.
China’s balance of payments analysis suggests that as a result, demand-supply in the market has swung.
Indeed, China’s banks’ purchases position has turned to net selling of the renminbi and buying of the dollar. However, this does not mean a dollar shortage in China’s corporate sector as a whole: in the first half of this year alone, its foreign currency deposits surged by US$117 billion. Rather, corporations are unwilling to convert all of their dollar proceeds into renminbi for fear of currency losses. We believe dollar liquidity will remain sufficient, and the renminbi should see modest recovery during the second half on a renewed central bank appreciation push.
Craig Chan, head of FX strategy for Asia ex-Japan, Nomura:
There has been a lot of focus on the short US dollar positions held by corporations. Banking sector data on FX settlement reveal corporates have been significant sellers of dollars. Indeed, accumulating the difference between the net dollar sales from corporates (related to trade) and the trade surplus over the past ten years to May 2012, the total has been US$720 billion.
What concerns Nomura is that the accumulation highlights the unwind risk if economic conditions worsen and renminbi depreciation expectations increase. This build up is similar to the large capital inflows reflected in the accumulation of FX reserves (in excess of the trade surplus and net foreign direct investment) over the years. The other fear is that part of the corporate dollar selling is from the accumulation of short-term debt. Data highlights this has been relatively large, standing at US$500.9 billion at the end of 2011, or around 6.7% of GDP.
But there are reasons to be less worried. About three quarters of short-term debt is financial institution and trade credit (almost equally split).
Authorities need to arrest this depreciation concern in the market and they have the ammunition to do this given FX reserves are around US$3.3 trillion (around 40% of GDP and around 6.6 times short-term debt).
There is also likely to be an increase in repatriation of offshore earnings over the past decade (because of globalisation), which could also account for the increase in non-trade related corporate dollar selling.
Overall, the inflows (effective dollar shorts) are a concern and the risk is a significant pick up in dollar demand if depreciation expectations are stymied. The pressure is already building as see in the gap between the spot and fix as well as some anecdotal indications from local banks of a dollar shortage onshore.