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Commentary: Future money uncertainties

By Zhang Monan (China Daily)

09:41, November 29, 2012

External factors have caused the recent rise in the yuan's spot exchange rate and the fall in its forward trading rates

The yuan's spot exchange rate against the US dollar has appreciated to a maximum daily ceiling more than 20 times since Oct 8.

The drastic appreciation, which has caused more and more domestic discussions about whether the yuan has entered a new appreciation cycle, is in sharp contrast with its continuous depreciation during most of the first half of this year. With a strong appreciation tendency, the yuan has continuously hit a new high against the dollar since China first launched reform of its exchange rate mechanism in 1994.

Compared with its robust spot exchange rate, the yuan's forward exchange rate, however, has gone the other way. Data from Bloomberg indicate that the one-month forward exchange rate discount for the yuan was 0.98 percent in mid-November, the biggest discount since December 2008. At the same time, its one-year non-deliverable forward contract price has also kept declining. Despite a slowed declining momentum recently, the yuan's non-deliverable forward contract price is still far below its spot exchange rate, and such a tendency is expected to continue.

What factors have been behind the recent drastic rise in the yuan's spot exchange rate and the opposite tendency in its forward exchange rates?

The increasing risk awareness following the launch of the second round of global quantitative easing has served as a direct external factor for the yuan's latest round of appreciation. In the face of a deteriorating sovereign debt crisis in the eurozone since the third quarter of this year and a lingering global economic slowdown, stagnation and even recession, all major countries have shifted the focus of policies and efforts to how to maintain economic growth.

In the context of soaring debt, central banks in major developed countries have begun an unprecedented race to loosen their monetary policies. After two rounds of long-term refinancing operations, the liabilities held by the European Central Bank have reached 3.2 trillion euros ($4.14 trillion), while the debt held by the US Federal Reserve has soared to $2.9 trillion. It is expected that the debts held by the ECB and the Federal Reserve will rocket even higher following the ECB's unlimited outright monetary transactions and the latter's open-ended third round of quantitative easing. Since the launch of a plan for purchasing assets, Japan's central bank has also raised the amount of such purchases nine consecutive times. The unrestrained monetary easing efforts by central banks in the world's developed countries have prompted the inrush of global liquidity to emerging economies as risk hedging.

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