Exclusive: China to tolerate weaker yuan, wary of trade partners’ reaction – sources


China’s central bank would tolerate a fall in the yuan to as low as 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent, policy sources said.

The yuan is already trading at its lowest level in more than five years, so the central bank would ensure any decline is gradual for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.

Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.

The economists and advisers are not directly briefed on policy by the People’s Bank of China (PBOC), but they have regular meetings and interactions with central bank officials and they provide policy recommendations. They said the central bank would tolerate a further weakening of the yuan this year to between 6.7-6.8 per dollar.

“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter.

“The Brexit vote was a big shock. The market volatility may last for some time.”

Investors keep a close watch when the yuan is in decline. A surprise devaluation of the yuan last August sent global markets into a spin on worries the world’s second-biggest economy was in worst shape than Beijing had let on, prompting massive capital outflows as investors sought safe havens overseas.

Other emerging market currencies have also fallen in the wake of Britain’s vote to leave the European Union, but the yuan is the weakest major Asian currency against the dollar this year.

Following the Reuters report, the yuan CNY=CFXS fell as low as 6.6549 per dollar, near a 5-1/2 year intraday low on Monday. State-owned banks were suspected of intervening to sell dollars, currency traders said.

At the low, the yuan had fallen about 2.4 percent this year.

After the report, the PBOC said China had no intention to promote trade competitiveness through depreciation of the yuan, a comment that has also been made repeatedly by Chinese Premier Li Keqiang.

Without citing any media by name, it said on its website that some media continuously published “inaccurate information” on the yuan’s exchange rate. These reports interrupt the normal operation of the market and help “speculative forces” short – or bet against – the yuan, it said.

TRADE RELATIONS

Currency dealers said the dollar’s strength and weakness in China’s economic growth, which hit a 25-year low in 2015, justified a decline in the yuan.

But a significant decline is likely to leave investors and trading partners concerned in the wake of August’s devaluation and another sharp decline in the currency over a matter of days in January, which analysts said was engineered by the central bank.

In the past decade, China has also faced criticism from Western lawmakers who say it held back the appreciation of the yuan.

Earlier this month, U.S. Treasury Secretary Jack Lew said it would be “problematic” if the yuan only went down over time and Trump has said he would take a hard line on trade disputes with China if elected.

Labeling China a currency manipulator “should’ve been done a long time ago,” he said on Wednesday.

China’s Foreign Ministry said on Wednesday the exchange rate was not the reason for unbalanced trade with the United States, which runs a goods and services trade deficit with China.

However, the sources acknowledged the diplomatic risks of a steep fall in the yuan.

“The pressure from the United States could rise if China allows sharp depreciation,” said a government source.

China has the biggest global exports market share of any country since the United States in 1968, so the yuan’s exchange rate acts as a bellwether for other exporting countries.

While a South Korean finance ministry official said “we are concerned” about the yuan’s slide, a person familiar with Japan’s currency diplomacy said the yuan’s decline didn’t seem out of line considering the dollar’s strength.

“I don’t think Japan has much to complain about,” this official said.

The officials of these major exporters declined to be identified given the sensitivity of the issue.

MARKET FORCES

“We should gradually let market forces play a bigger role. The market believes that the yuan is under pressure, so our foreign exchange policy should follow this trend,” said a researcher with the Commerce Ministry.

“China needs to safeguard its economic growth and trade but also make sure we don’t create competitive devaluation.”

Julian Evans-Pritchard, China economist at Capital Economics, said in a note last week that a sharp fall “could set off a renewed bout of fears over renminbi depreciation and a pick-up in capital outflows.” The yuan is also known as the renminbi.

But he said the central bank would want to avoid “panic” so was likely to intervene to stabilize the currency if need be.

The PBOC has been trying to reform the way it manages the yuan by making it more market-driven and transparent.

It sets the yuan’s daily mid-point versus the dollar based on the previous day’s closing price, taking into account changes in major currencies, analysts and officials said.

This year, the PBOC has been guiding the yuan lower by pegging it to the dollar when the U.S. currency weakens and pegging it to a basket of currencies when the dollar rises, they said.

The currency regime gives the central bank more room to allow two-way swings in the yuan versus the dollar, deterring one-way bets on the currency.

The CFETS RMB Index, a trade-weighted exchange rate index that was unveiled by the central bank in December, fell 5.6 pct between the end of 2015 and June 24 of this year, although the central bank has pledged to keep the yuan basically stable against the basket.

(Reporting by Kevin Yao and monitoring desk in BEIJING; Nate Taplin and Lu Jianxin in SHANGHAI; Leika Kihara in TOKYO and Christine Kim in SEOUL; Editing by Neil Fullick.)

Source: Reuters “Exclusive: China to tolerate weaker yuan, wary of trade partners’ reaction – sources”

Advertisements

China’s 5 Anti-ship Missiles US Has No Effective Defense for 10 Years


Lots of DF-21D erected for volley

Lots of DF-21D erected for volley

China's YJ-12 anti-ship missiles

China’s YJ-12 anti-ship missiles

China's YJ-18 anti-ship cruise missile

China’s YJ-18 anti-ship cruise missile

Launch of China's YJ-18 from a warship

Launch of China’s YJ-18 from a warship

China’s DF-21D and DF-26 anti-ship ballistic missiles have already been well-known. In my post “Volley of China’s DF-21D Missiles Kills US Aircraft Carrier at Very Low Cost” on June 6, I said China was able to launch a volley of at least 168 DF-21D missiles simultaneously from its six DF-21D rocket brigades to kill an entire US aircraft carrier battle group in no time.

In addition, the launch vehicles can be reloaded in hours for a second volley.

DF-26 is said to be more powerful, but there is no information about its number and the number of DF-26 China is able to launch in a volley.

According to Depth Column of mil.news.sina.com.cn, to ensure that no US warships can escape China’s annihilation counterattack, China has, in addition, developed three kinds of anti-ship cruise missiles that the US has no effective defense: YJ-12, YJ-18 and YJ-100.

YJ-12 weighs between 2-2.5 tons. It has a terminal speed of Mach 4.0 as it uses a scramjet engine. It has a range of 400 km. As it is carried by fighter jets, fighter/bombers and bombers such as Su-30MKK, J-16 and H-6G/K, the range of attack of YJ-18, including that of the warplane, can be 2,000 km and longer. Its high speed makes it difficult to intercept. One such heavy missile can kill one US Aegis destroyer while more than 2 can neutralize an aircraft carrier.

YJ-18 is another powerful anti-ship cruise missile that the US has no effective defense. It is but supersonic at its terminal stage but it flies with a zigzag trajectory difficult to intercept. It is mainly launched from the VSL of China’s Type 052D destroyers and 093A/B attack nuclear submarines.

According to mil.sohu.com, Britain’s Jane’s Defense Weekly says that the anti-radiation function of YJ-18 is so powerful that it destroys 60% of an Aegis warship’s electronic system even if it explodes 50 meters away from the warship.

Compared with YJ-12 and YJ-18, YJ-100 is not well-know as it is a new missile disclosed by foreign media not long ago. Its greatest advantage is its long range of 800 km for beyond visual range attack with a low trajectory. It is said to be used by China’s new large Type 055 destroyer.

According to mil.news.sina.com.cn, the simultaneous attack by two of the above five kinds of missile will be surely lethal.

Source: mil.news.sina.com.cn “Depth Column: The five Chinese Missiles that the West will have no effective defense for a decade” and mil.sohu.com “Foreign media regards YJ-18 as one of the best anti-ship cruise missiles, one of which can paralyze a US warship” (summary by Chan Kai Yee based on the reports in Chinese)


China slams South China Sea case as court set to rule


A fisherman repairs his boat overlooking fishing boats that fish in the disputed Scarborough Shoal in the South China Sea, at Masinloc, Zambales, in the Philippines April 22, 2015. REUTERS/Erik De Castro

A fisherman repairs his boat overlooking fishing boats that fish in the disputed Scarborough Shoal in the South China Sea, at Masinloc, Zambales, in the Philippines April 22, 2015. REUTERS/Erik De Castro

An international court said on Wednesday it would deliver a hotly anticipated ruling in the Philippines’ case against China over the South China Sea on July 12, drawing an immediate rebuke from Beijing, which rejects the tribunal’s jurisdiction.

The United States, which is a close ally of the Philippines and is concerned about China’s expansive South China Sea claims, reiterated its backing for The Hague-based Permanent Court of Arbitration and urged a peaceful resolution of the dispute.

Manila is contesting China’s historical claim to about 90 percent of the South China Sea, one of the world’s busiest shipping lanes. Several Southeast Asian states have overlapping claims in the sea and the dispute has sparked concerns of a military confrontation that could disrupt global trade.

In a lengthy statement after the court’s announcement of the July 12 ruling date, Chinese foreign ministry spokesman Hong Lei said Manila’s approach flouted international law.

“I again stress that the arbitration court has no jurisdiction in the case and on the relevant matter, and should not hold hearings or make a ruling,” he said.

“The Philippines’ unilateral lodging of the South China Sea arbitration case is contrary to international law.”

He said: “On the issue of territory and disputes over maritime delineation, China does not accept any dispute resolution from a third party and does not accept any dispute resolution forced on China.”

In Manila, presidential communications secretary Herminio Coloma Jr said the Philippines “expects a just and fair ruling that will promote peace and stability in the region”.

U.S. state department spokeswoman Anna Richey-Allen reiterated U.S. backing for the court. “We support the peaceful resolution of disputes in the South China Sea, including the use of international legal mechanisms such as arbitration.”

China’s official Xinhua news agency said the court was a “law-abusing tribunal” that had “widely contested jurisdiction.” It said the case would only worsen the dispute.

“Manila fails to see that such an arbitration will only stir up more trouble in the South China Sea, which doesn’t serve the interests of the concerned parties in the least,” it said.

The case “even threatens to further complicate the issue by giving certain parties in the disputes the false impression they could profit by deliberately creating chaos”, Xinhua added.

China’s bases its South China Sea claim on a so-called “Nine Dash line” stretching deep into the maritime heart of southeast Asia and covering hundreds of disputed islands and reefs, rich fishing grounds and oil and gas deposits.

The Philippines argues that China’s claim violates the U.N. Convention on the Law of the Sea and restricts its rights to exploit resources and fishing areas within its exclusive economic zone.

U.S. officials are worried China may respond to what is widely expected to be a negative ruling for Beijing by declaring an air defense identification zone in the South China Sea, as it did in the East China Sea in 2013, and by stepping up its building and fortification of artificial islands.

U.S. officials say that beyond diplomatic pressure, the U.S. response to such moves could include accelerated “freedom-of-navigation” patrols by U.S. warships and overflights by U.S. aircraft as well as increased defense aid to southeast Asian countries.

China has accused the United States of “hyping” the issue and warned in May that international complaints about its actions in the South China Sea would snap back on its critics. But it has largely avoided specific threats of how it might respond to the arbitration ruling.

(Additional reporting by Manny Mogato in Manila and David Brunnstrom on Washington; Editing by Richard Balmforth)

Source: Reuters “China slams South China Sea case as court set to rule”


China risks ‘outlaw’ status if it rejects South China Sea ruling: lawyer


A fisherman repairs his boat overlooking fishing boats that fish in the disputed Scarborough Shoal in the South China Sea, at Masinloc, Zambales, in the Philippines April 22, 2015. REUTERS/Erik De Castro

A fisherman repairs his boat overlooking fishing boats that fish in the disputed Scarborough Shoal in the South China Sea, at Masinloc, Zambales, in the Philippines April 22, 2015. REUTERS/Erik De Castro

An international ruling next month is expected to deprive China of any legal basis for its claim to most of the South China Sea, and Beijing risks being seen as an “outlaw state” unless it respects the outcome, the Philippines’ chief lawyer in the case said on Wednesday.

In an interview with Reuters, veteran Washington attorney Paul Reichler expressed confidence that the Permanent Court of Arbitration, based in The Hague, would rule in Manila’s favor on July 12 in a highly charged case against Beijing, which rejects the tribunal’s jurisdiction and says it will ignore the ruling.

The Philippines, a close U.S. ally, is contesting China’s historical claim to about 90 percent of the South China Sea, one of the world’s busiest shipping lanes. Several Southeast Asian states have overlapping claims in the sea, and the dispute has sparked concerns of a military confrontation that could disrupt global trade.

Reichler, who heads Manila’s legal team in the 3-1/2-year-old case, said he was not privy to the ruling and did not expect to be informed until the last minute. But he had little doubt that Manila would win the legal argument, matching the consensus in Washington and most major foreign capitals.

“We are confident we will have success on the merits,” said Reichler, who called the case potentially one of the most far-reaching to be decided by the court. He spoke just hours after the court announced the date for its ruling.

China bases its South China Sea claim on a “Nine Dash line” stretching deep into the maritime heart of Southeast Asia and covering hundreds of disputed islands and reefs, rich fishing grounds and oil and gas deposits.

Reichler said a ruling against Beijing “would deprive China of any legal basis for making such a claim.” Manila argues that China’s claim violates the U.N. Convention on the Law of the Sea and restricts its rights to exploit resources and fishing areas within its exclusive economic zone.

On Wednesday, China said Manila’s approach flouted international law and Beijing would not accept any third-party decision on the issue.

Reichler said for China to reject the ruling meant it had “essentially declared themselves an outlaw state” that did not respect the rule of law.

Reichler is an international lawyer with a reputation for representing small countries against big powers, including a 1980s case by Nicaragua that accused the United States of funding right-wing Contra rebels against a left-wing government.

Amid rising tensions in the South China Sea, Reichler said “nobody wants or should even contemplate the use of force.”

He predicted China would face pressure to abide by the ruling from other rival claimants, including Vietnam, Indonesia and Malaysia, despite signs that some other Southeast Asian countries are wavering in response to U.S. efforts to forge a unified regional front.

“It may be that in time … the Chinese will come to realize that they have more to lose than to gain from creating a chaotic, lawless situation,” he said.

China has accused the United States of “hyping” the dispute and has warned that complaints would snap back on its critics. But it has largely avoided specific threats of how it might respond to the ruling.

U.S. officials are worried China may declare an air defense identification zone in the South China Sea, as it did in the East China Sea in 2013, and by stepping up its building and fortification of artificial islands.

They say the U.S. response to such moves could include accelerated “freedom-of-navigation” patrols by U.S. warships and overflights by U.S. aircraft as well as increased defense aid to regional countries.

(Editing by Leslie Adler)

Source: Reuters “China risks ‘outlaw’ status if it rejects South China Sea ruling: lawyer”


New Philippine defense chief says militant threat more pressing than South China Sea


Philippine Defence Secretary Voltaire Gazmin (R) talks to Indonesian Defence Minister Ryamizard Ryacudu (L), Malaysian Defence Minister Dato Seri Hishammuddin Tun Hussein (2nd-L), and Delfin Lorenzana (2nd-R) during a trilateral meeting on border security at the Defence Ministry at military's main Camp Aguinaldo in Quezon city, Metro Manila, Philippines June 20, 2016. Armed Forces of the Philippines/Handout via REUTERS

Philippine Defence Secretary Voltaire Gazmin (R) talks to Indonesian Defence Minister Ryamizard Ryacudu (L), Malaysian Defence Minister Dato Seri Hishammuddin Tun Hussein (2nd-L), and Delfin Lorenzana (2nd-R) during a trilateral meeting on border security at the Defence Ministry at military’s main Camp Aguinaldo in Quezon city, Metro Manila, Philippines June 20, 2016. Armed Forces of the Philippines/Handout via REUTERS

Crushing Islamist militants in the Philippines will take precedence over territorial disputes in the South China Sea, the incoming defense minister said on Wednesday, and spending on military hardware would reflect that.

Ongoing kidnappings and the recent beheading of Western hostages by Abu Sayyaf rebels were hurting the country’s reputation, and incoming president Rodrigo Duterte was frustrated by the failure to rein in the group, Delfin Lorenzana told Reuters.

He said the military would invest in more speed boats and helicopters to help flush out the group based on southern Jolo island, rather than divert funds into maritime security amid rising tensions and militarization in the South China Sea.

“These illegal activities, including kidnapping, must stop,” Lorenzana, a former army general, said in his first interview with foreign media since being named defense minister. He is formally appointed on Thursday, along with Duterte.

“I share the frustrations of the president and our people. We have to end this once and for all. This problem is giving us a very bad image abroad.”

Abu Sayyaf is believed to be linked to al Qaeda, and has also claimed it has ties to rival jihadi movement Islamic State, although in the latter case, authorities say there are no proven operational ties.

FOREIGN PRESSURE

Despite years of military offensives, the Philippines has made little concrete progress towards defeating Abu Sayyaf, since the group started operating in the 1990s.

Experts say that its network is funded in part by ransom money worth tens of millions of dollars, which it has used to buy modern boats, technology and weapons.

Manila is under renewed pressure to tackle Abu Sayyaf following the recent decapitation of two Canadian hostages and the kidnapping of Indonesian sailors which led to the suspension of coal shipments from the Philippines’ main supplier.

The militants are holding at least 14 hostages to ransom – one Dutch, one Norwegian, five Filipinos and seven Indonesians.

Lorenzana’s comments about his defense priorities will add to uncertainty about Duterte’s position on the Philippines’ sometimes bitter dispute with China over sovereignty in the South China Sea, a key global trade route.

Relations between the countries are particularly sensitive now, with an international tribunal in The Hague preparing to rule in a case brought by Manila that could undermine Beijing’s claims to the disputed waters.

Duterte has been accused of flip-flopping, saying he would confront Beijing but also saying that he would engage through dialogue.

China claims almost the entire sea. Brunei, Malaysia, the Philippines, Taiwan and Vietnam also have claims.

Lorenzana said the defense budget should be spent on winning security at home rather than buying fighter jets to protect its waters, as the Philippines would not be going to war with any country. However, he said sovereignty was still a key issue.

“We cannot ignore the West Philippine Sea (South China Sea) because that is in our mandate,” he said. “It’s both a resource and a sovereignty issue.”

Lorenzana, a Mindanao-born former special forces commander, said a plan was in place to take on Abu Sayyaf, although he declined to give specifics. He said the military would also assist Duterte’s crime-fighting agenda.

“Our focus will be the Abu Sayyaf issue. Next will be to support the police in their all-out war against crime and drugs,” he said.

(Reporting By Manuel Mogato; Editing by Martin Petty and Mike Collett-White)

Source: Reuters “New Philippine defense chief says militant threat more pressing than South China Sea”


China’s Newest Type 095A Attack Nuclear Submarine


China's 095 attack nuclear submarine. Photo from mil.huanqiu.com's report today

China’s 095 attack nuclear submarine. Photo from mil.huanqiu.com’s report yesterday

China's 095 attack nuclear submarine. Photo from mil.huanqiu.com's report yesterday

China’s 095 attack nuclear submarine. Photo from mil.huanqiu.com’s report yesterday

In an article on China’s third-generation Type 095A attack nuclear submarine, China’s official military forum mil.huanqiu.com says that China follows Western design in developing the new attack nuclear submarine. It has a single hull shell with small sound reflection area.

The article provides the following data of the submarine:

Length: 115 m
Beam: 12 m
Draft: 11 m
Displacement: 7,900 tons
Maximum diving depth: 500 m
Maximum underwater speed: 32 knots
Endurance: 80 days
Crew: 130
Armament: eight 533 mm torpedo tubes, capable of launching China’s homegrown supercavitation speed torpedoes, submarine-launched YJ-83 antiship missiles and HQ-10 short-range air defence missile for shooting down antisubmarine helicopters. Its improved version Type 095A is installed with 16 VSL for CJ-10 cruise missiles for ground attack.

Source: mil.huanqiu.com “Get some idea in advance of the excellence of China’s Type 095A nuclear submarine” (summary by Chan Kai Yee based on the report in Chinese)


Why the US Navy Should Fear China’s New 093B Nuclear Attack Submarine


China's 095 attack nuclear submarine. Photo from mil.huanqiu.com's report today

China’s 095 attack nuclear submarine. Photo from mil.huanqiu.com’s report today

China's 095 attack nuclear submarine. Photo from mil.huanqiu.com's report today

China’s 095 attack nuclear submarine. Photo from mil.huanqiu.com’s report today

By Dave Majumdar June 27, 2016

Is China’s new Type 093B nuclear-powered attack submarine on par with the U.S. Navy’s Improved Los Angeles-class boats?

At least some U.S. naval analysts believe so and contend that the introduction of the new People’s Liberation Army Navy (PLAN) submarines is an indication of just how quickly Beijing is catching up to the West.

“The 93B is not to be confused with the 93. It is a transition platform between the 93 and the forthcoming 95,” said Jerry Hendrix, director of the Defense Strategies and Assessments Program at the Center for a New American Security—who is also a former U.S. Navy Captain. “It is quieter and it has a new assortment of weapons to include cruise missiles and a vertical launch capability. The 93B is analogous to our LA improved in quietness and their appearance demonstrates that China is learning quickly about how to build a modern fast attack boat.”

Other sources were not convinced that Beijing could have made such enormous technological strides so quickly—but they noted that the topic of Chinese undersea warfare capability is very classified. Open source analysis is often extremely difficult, if not impossible. “Regarding the question on the Type 093B, I really don’t know, anything is possible I suppose, but I doubt it,” said retired Rear Adm. Mike McDevitt, now an analyst at CNA’s Center for Naval Analyses. “I have no doubt that the PLAN has ambitions to at least achieve that level of capability and quietness.”

Though the Seawolf and Virginia-classes have surpassed the Improved Los Angeles-class as the premier U.S. Navy attack submarines, such older vessels will remain the mainstay of the service’s undersea fleet for many years to come. If the People’s Liberation Army Navy’s newest boats are able to match the capabilities of the U.S. Navy’s shrinking undersea fleet, Washington could be in serious trouble. Indeed, the U.S. Navy already anticipated that it could be facing-off against a Chinese submarine fleet that is nearly twice its size, but not as technically capable.

The U.S. Navy—which has roughly 52 attack submarines—is on track to have 41 attack boats by 2029. The Chinese, meanwhile would have “at least 70, and they’re building,” Vice Adm. Joseph Mulloy, the service’s deputy chief of naval operations for integration of capabilities and resources told the House Armed Services Committee’s seapower and projection forces subcommittee on February 25. “You get back into the whole quality versus quantity issue, but at the same time the Russians are also building…and they build much higher-end submarines.”

In a 2016 report to Congress, the Pentagon noted that Beijing continues to upgrade and expand its submarine fleet: “China continues to improve its SSN force, and four additional SHANG-class SSN (Type 093) will eventually join the two already in service. The SHANG SSN will replace the aging HAN class SSN (Type 091). These improved SHANG SSNs feature a vertical launch system (VLS) and may be able to fire the YJ-18 advanced anti-ship cruise missile (ASCM). Over the next decade, China may construct a new Type 095 nuclear-powered, guided missile attack submarine (SSGN), which not only would improve the PLAN’s anti-surface warfare capability but might also provide it with a more clandestine land-attack option.”

The problem, however, is if Hendrix’s assessment is correct and future Chinese submarines are only slightly less capable than the Virginia or Seawolf-class vessels, the Navy could be in trouble. The technological edge the U.S. Navy—which is already woefully short on attack boats—is counting on might not be sufficient to counter Chinese numerical superiority. However, the service is continuing to improve the performance capabilities of its submarines on a continual basis. Nonetheless, one former U.S. Navy undersea warfare officer suggested that the service would come to regret having truncated the high-performance submarine-hunting Seawolf-class at three boats and focusing instead on the more multi-role Virginia-class.

Aware of the coming attack boat shortfall, the U.S. Navy is hoping to boost its attack submarine fleet by continuing to build two Virginia-class vessels per year even while it builds the next-generation Ohio Replacement Program ballistic missile submarine. However, if the Chinese are truly catching up technologically, Congress might consider accelerating the attack submarine build rate to the maximum capacity of America’s two nuclear-capable shipyards. At the same time, the U.S. Navy might have to accelerate the development of the next-generation successor to the Virginia-class, which has been tentatively designated the SSN(X) program and is scheduled to enter service in 2044.

Dave Majumdar is the defense editor of The National Interest. You can follow him on Twitter @DaveMajumdar.

Source: National Interest “Why the US Navy Should Fear China’s New 093B Nuclear Attack Submarine”