A blog on Chinese economy & society

Posts Tagged ‘exchange rate

Baby steps towards full convertibility for RMB

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China has been aggressively promoting the usage of RMB in international trade, preparing it for the eventual full convertibility of the currency. Besides opening access to its domestic bond market to selected foreign investors that I blogged before, it also starts to allow trading of the RMB against Malaysian Ringgit in its domestic FX market today. The Ringgit is a good guinea pig. Since China is already Malaysia’s largest trading partner, it makes sense to try to settle bilateral trade in their respective currencies rather than through the USD. On the other hand, both are effectively soft-pegged to the dollar, eliminating possibility for wild currency swings.

Separately, McDonald’s is selling $29mn RMB denominated bonds in Hong Kong. This is the first non-financial foreign entity to try this issuance. Yes, China is sticking to its game plan, that is to promote more usage of the RMB in international trade and in financial products. All these efforts eventually will lead to full convertibility a few years down the road, and challenge the USD’s role as the global reserve currency for real.


Written by Cindy Luk

August 19, 2010 at 6:58 pm

Sparring of words over the RMB

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All focus has been on the “unusually uncertain” comment by Bernanke, though the hearing touched on Chinese currency issue as well. As reported by Reuters:

Under questioning by one of those lawmakers, Senator Sherrod Brown, Bernanke answered “yes” when asked if he stood by a statement he made several years ago calling China’s exchange-rate policy an effective subsidy.

When pressed how much China’s yuan was undervalued, Bernanke said: “The numbers that you see in the literature range between the 10 and 30 percent range.”

As November approaches, it’s only expected that the US will push harder on this front. But are they going to get their wish fulfilled? This one is from AFP:

“The exchange rate of the currency will decline if it becomes necessary to support exports,” Zhou [Qiren, a member of the central bank’s monetary policy committee] told the Asahi Shimbun [of Japan] in an interview, according to the paper’s English-language website.

I don’t know about you, but I think Chinese exports will weaken substantially in H2 as the US non-recovery recovery sputters and European austerity kicks in. China’s own stimulus is also losing steam, so much so that the banks are quietly relenting on strict lending restrictions.  If you think China’s going to become a good Samaritan in this environment, I’ve got a bridge to sell you.

Written by Cindy Luk

July 22, 2010 at 3:30 am

Is China dumping treasuries?

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This is the million dollar (literally!) question.

Yes China had said that it wouldn’t use the nuclear option and probably meant it, ’cause there’s no need for it to actively sell down UST. As today’s TIC data indicates, China trimmed its UST holdings by not rolling over its maturing T-bills. This way, China can reduce its UST holdings w/o alarming the market. Plus, China also has large amount of foreign currency inflows each month from its trade surplus. It can simply buy less of the UST.

The question should be where does China put its cash instead? In addition to resources shopping spree across the globe, another option is to diversify into other currencies. JGB and euro bonds have both seen strong Chinese demand lately. The FT reports that Chinese Premier Wen Jiabao voiced strong support for the euro during a state visit from Angela Merkel. What it fails to pick up is the connection between that and China’s recent change in its currency regime to a reference making up of a basket of currencies. Reuters is doing a better job of reporting the meeting.

China is a responsible, long-term investor that has always pursued the principle of diversifying its investments, Wen said.
“The European market has been in the past, is now and will be in the future one of the main investment markets for China’s foreign exchange reserves,” he said.

Given the massive appreciation of RMB against the euro so far this year, diversifying into euro assets has the added benefits of supporting Chinese exports to Europe, China’s largest market, bar none. Given time, it will also result in slight appreciation of the RMB against the USD, deflecting some political heat. But make no mistake, there’s no free lunch in this world. Diversification away from treasuries will surely have an impact on US interest rates. Spain “successful” bond issue last Tuesday came at almost 15% higher yield than in April.

Written by Cindy Luk

July 17, 2010 at 2:45 am

Posted in China, Macro

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The use of nuclear option

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From Reuters:

The U.S. Treasury Department again declined to label China a currency manipulator in a long-delayed report issued late on Thursday that is likely to provoke Congressional calls for tougher methods with Beijing.

So this was what all that chatter of China’s Treasury holdings as the nuclear option was  about. The blogosphere was rife with snarks of how China would be suicidal by going nuclear. But the use of nuclear weapon has always been in deterrence. NOBODY really goes nuclear, but it helps to have it to scare the other guy into cutting you some slack.

Written by Cindy Luk

July 8, 2010 at 11:05 pm

Posted in China, Macro

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Chinese labor disputes and consumption

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The AP has a nice article on the recent labor disputes, in the context of the transition of Chinese economy.

Boosting wages fits in with Beijing’s strategy of closing the income gap and promoting more equal growth in coming years, said Liu Shanying, an analyst at the Chinese Academy of Social Sciences’ Institute of Political Science in Beijing.

“If incomes won’t go up, how can domestic demand be boosted? Strikes for better pay are very much in line with the big trend of Chinese economic development,” he said.

One reason behind the more assertive work force is a shifting job market since China pumped up its economy with massive stimulus spending to fend off the global recession. Manufacturing has begun to expand into the Chinese interior, leaving traditional industrial enclaves on the coast competing for labor and giving workers a stronger bargaining position.

Workers “have the upper hand, and also sense the government is trying to address inequalities, so the workers feel more comfortable in pushing for high wages,” said Lee. [Chang-Hee Lee, a specialist on industrial relations at the International Labour Organization’s Beijing office.]

As I said before, all these are part and parcel of China’s push to rebalance its economy geographically (away from the Eastern coast) and structurally (towards households and consumption). Therefore, China is going down the path of internal revaluation rather than external adjustment via the currency. As a result, we are going to see an explosion of Chinese consumption in the coming decade. But GDP is likely to be more moderated. There already have been discussions on the viability of the current 8% “minimum growth target”. Not that China needs that high a growth rate anymore, with less people entering the workforce due to changes in demographics.

Does this mean the recent change in currency regime is nothing but a hoax? Yes if you are an exporter competing against China. But for China, this is just a necessary step towards turning the RMB into a reserve currency in the future. With substantial internal revaluation and the elimination of many export subsidies, some punters are already calling the RMB overvalued. Li Dao-kui, a member of the Chinese Monetary Policy Committee, suggested that it would take the RMB 10-15 years to be fully convertible and competitive as a reserve currency.

Written by Cindy Luk

June 27, 2010 at 9:31 pm

The real Chinese revaluation story

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The media has been busy propagating and debunking the RMB revaluation story, but I think both narratives are off-target. Yes, China is having a significant revalution, just not with its currency.

Instead, China has chosen an aggressive program of internal revaluation, i.e. raising costs for the exporters internally, by inducing wage-led inflation, cutting export subsidies, and stiffening environmental regulations etc.

Most of the recent coverage of China’s labor disputes have focused on the workers’ being simply more demanding in sharing the spoils. But one should also note the subtle, and very important, support that the Chinese government is giving them. Besides rallying behind the workers in state media, labor activists have been allowed to organize freely (rare for China’s pro-capital government), so long that they train the target on wage demand only. Raising the minimum wage is also a cue for the workers that their action is being sanctioned by the state.

Why is China going this route instead of currency appreciation recommended by the developed economies? Well, this is simply a better way of adjustment for China. With currency appreciation, the losses to Chinese exporters become gains for exporters in other countries, i.e. a net loss of wealth for China. With internal revaluation, the benefits go towards Chinese workers, i.e. only a redistribution of wealth within China. This later approach also helps in building up a middle class and reorient the economy towards more consumption.

Another way to achieve internal revaluation is by cutting export subsidies. China has announced cutting export rebates on over 400 types of products deemed energy-intensive or polluting. This allows the government to target only industries deemed inefficient and force them to upgrade, and helps soothing trade relations with the West as a bonus.

The implementation of environmental regulations has also been tightened, to the benefits of future generations of Chinese. Again, this is an area that simple currency appreciation may not be as effective.

At the end of the day, although China has decided to bite the bullet and pony up for rebalancing its economy, it still seeks to minimize the costs and maximize the benefits. It’s just that their preferred method may not be the most desirable one from the POV of the developed economies.

Written by Cindy Luk

June 24, 2010 at 5:17 am

When is China going to truly revaluate?

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As if to underscore the term “flexibility”, the RMB/USD exchange rate rose AND fell, in an apparent bid to deter speculators. Does this mean that the new regime is new in name only? That the RMB will not appreciate at all? I don’t think so. But I think the rate of appreciation will be modest (i.e. 2-3% by YE), as in the tradition of Chinese policy, and fall way short of what the Schumers of the world demand. But then, since when is Chinese policy driven by anything other than domestic considerations?

Why do I think that the RMB will truly revaluate? ’cause the timing is right. In its bid to free itself from dollar bondage, China will need to have a floating, freely-exchangeable currency eventually. With inflation running amok and the euro dropping like a stone, going dirty-peg now requires minimum real appreciation, as the RMB has already appreciated in real trade-weighted terms. This is a way to soften the punch of reform.

Because of capital control, all financial institutions have to deposit their foreign currencies deposits with the PBoC, which in turn deposit them with SAFE, one of China’s reserve managers. The flow and amount of these deposits is a proxy for hot money inflow. These foreign deposits, which rose sharply in H2/2009 to about USD300bn per month, dropped significantly in May, perhaps due to concern over China’s policy tightening. So China is essentially under the least speculative pressure to appreciate in months. Score two for softening the punch.

When is this going to happen? It’s been reported that some Taiwanese companies have converted most of their dollar holdings into RMB as they have been warned by their Chinese bankers that revaluation will come within a couple of months. This is a good enough take for me.

Written by Cindy Luk

June 23, 2010 at 2:54 am

Posted in China, Macro

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