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Posts Tagged ‘Yuan

What have the US-China talks achieved?

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The so-called Sino-American Strategic and Economic Dialogue has been properly wrapped up, with a plethora of agreements signed. But what has it actually achieved? Probably not much, as usual.

Rmb revaluation has been relegated to the back burner, as expected. The two nations have agreed to:

  1. Balance their respective economies, with the US increasing savings (you don’t really think this is going to happen, do you?) and China increasing consumption (even if they do succeed, this will be a decade-long project at best).
  2. Fair trade. The US has promised to consider recognizing China as a market economy, and China is to give equal access to foreign companies (presumably in government purchases). This is potentially the most important result coming from the talks, and I’ll come back to this later.
  3. Some sort of vague cooperation in the financial field.
  4. blah, blah, blah
  5. They agree to talk some more in the future.

That’s about it in trade related results. There are some other stuff regarding new energy and geopolitics etc.

On the fair trade agreement, what the US has promised potentially has important impact on many anti-dumping cases where “Chinese real wages” are often imputed from other economies as China is currently not considered a market economy. If this is to be implemented, Commerce Dept. will have much higher burden of proof in anti-dumping cases that it initiates. Is this likely to happen? I’m not holding my breath. The current economic environment really is not exactly conductive to lessening trade tensions. Unless the US is thinking about imposing overt tariff, it is not likely to weaken the power of its anti-dumping mechanism. The keyword in the agreement is “promised”. It’s going to be a long and convoluted way to actual implementation, if at all.

On the Chinese front, it’s all promises as well. US companies have protested vehemently about China’s “indigenous rule”, devised to promote domestic technologies. Since China has never signed up to the WTO treaty that gives equal access in governmental access, the US has to use other leverage. China has since modified the rule, but the devil is in the details. Since China sees creativity, or rather the lack of which, as a national, strategic issue, I doubt it’s going to backtrack on the core pieces of the new rule. An official has clarified earlier this week that only value-added portions carried out within China by a foreign company will be considered as national in doling out governmental purchases. In other words, if you want to be considered a domestic company, you need to manufacture and carry out key R&D in China.


Written by Cindy Luk

May 26, 2010 at 3:31 am

Impact of the European crisis on China

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While the endless rounds of flip-flops are entertaining in a wicked way, it will be stupid to treat the European crisis as just a reality show. For one thing, the EU, rather than the US, is China’s largest export market, and exporters are already howling from the pain of an effective 14.5% currency appreciation in 4 months against the euro.

What else? Most have given up on any prospect of immediate revaluation of the RMB. The US is already harping a different tone regarding currency ahead of the Sino-American Strategic and Economic Dialogue next week. There are also stories of hot money outflow. Michael Pettis rambles on the prospect of more trade conflicts, perhaps even in the form of tariffs. Shocking! Economic basket case resorts to beggar-thy-neighbor policies and trade conflicts (or any sort of conflicts) intensify during hard times. What’s more interesting is actually at the end of the post, almost as an afterthought, he suggests that China might be able to mitigate the risk by buying euros.

By the way is there anything that China can do to head off conflict?  Yes.  It can buy euros, the more the better –just lift every offer out there.  By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China.  Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.

I know, I know, China had just sold its euro bonds and parked the money in dollar, as per the most recent TIC data. But I still think this scenario is more than feasible. When the crescendo calling for RMB revaluation was at its loudest, western media were full of quotes from “Chinese experts” that seem to readily acquiesce to RMB appreciation. However, when you actually look at their speech, preferably in the original, what those people are advocating is a reform of the currency management mechanism rather than straight appreciation per se. One term that pops up very often is “basket of currencies”, i.e. replacing the USD reference with a secretive brew of multiple currencies, a la Singapore. Li Daokui, member of the monetary policy committee of the PBoC is flogging the basket of currencies idea these days. A central government think tank is also calling for breaking the “predictable path of currency movement”.

In this sense, the current dollar strength actually gives China good cover to carry out with the proposed reform. Instead of maintaining a hard peg with the dollar, China can intervene by buying up some euros, and selling from its dollar reserves to pay for it of course. This diversification will help to halt the RMB’s appreciation against the euro and will appease to US cries for stronger RMB. Parking your wealth in the bunds is way safer than the treasuries, if you ask me.

The natural implication of this change in regime is an inevitable rise in US interest rate. When you have a buyer boycott, it is possible to have higher interest rate despite hollowing deflation. China has not withdrawn her money from the Bank of the US so far, only because it has nowhere else to go. After a substantial fall in the euro, and most of Europe’s problems priced in, things might look quite different.

The irony of it, should it materializes, is that the RMB might appreciate against the dollar just when about everyone has written it off, and those that pushed for it might live to regret it.

Written by Cindy Luk

May 20, 2010 at 2:42 am

China to see more trade deficit in April

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China’s March trade deficit was written off as an one-off fluke by many commentators. However, it seems that the trend many economists have expected it to continue, at least into April, with a consensus forecast of USD1.2bn in trade deficit.

Granted, this is already down substantially from March’s USD8bn, but it will serve to deflect criticism of China’s currency peg ahead of the Sino-US Strategic Forum in May. As such, those betting on RMB appreciation will likely to be seriously disappointed.

Going forward, it’s entirely possible that things will return to the unsustainable “normal” by May. The main driver of this outlook being a slowdown in imports, which in turn is simply a result of the government’s tightening efforts.

Written by Cindy Luk

May 7, 2010 at 9:46 pm

There is no RMB revaluation

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All this hoopla will turn out to be, well, hoopla. The vice minister of China’s Commerce Ministry, Zhong Shan, said publicly during the Canton Fair (China’s semi-annual, all important, has to be there, export mainly, trade show) that the RMB exchange rate would stay put. And that the US had already OK this! This talk was given in the context of clearing the minds of exporters who were trying to determine pricing and terms during the show.

Yes, we’re sticking to our view that a widening trading band, and only that, is coming. But China is likely to change its peg to an enlarged basket of currencies in the short term, which ultimately will result in some appreciation as the dollar is going down the tube. Therefore, even though there’s no immediate appreciation, more bones might be thrown before November for appeasement.

And going forward, the RMB is likely to appreciate gradually as China slowly builds its domestic market, as cheaper energy and resources eventually will come to count more to the Chinese than competitive exports.

Written by Cindy Luk

April 18, 2010 at 11:25 pm

Andy Xie: China should hike interest rate rather than revaluate its currency

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From Century Weekly, Xie’s views on interest rates and exchange rate. Insightful as usual.

But acting on the currency first, especially in small steps, would further inflate China’s property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan’s value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.

This was exactly what happened in 2005, making the bet on RMB revaluation a sure win and attracting more hot money inflows. Despite capital control, lots of hot money still manage to get in, as the system is rather porous. A major receptor for these speculative inflows is the Chinese property market.

By all measures (stock value to GDP ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields, and vacancy rates) China’s property market is one of the biggest bubbles ever. It’s probably much bigger than the U.S. property bubble relative to GDP.

Xie doesn’t have much kind words for those who tout currency appreciation as “good for China” in the sense it helps contain inflation.

Why is this policy option so popular among interest groups? Because it would fuel the hot money inflow, which in turn would support and expand the property bubble. Of course, inflating the property bubble will only worsen inflation. And the odds are that a small currency appreciation would only make the property bubble bigger and inflation worse.

In a standard economy, currency appreciation cools inflation by decreasing import prices. China’s imports are mainly raw materials, equipment and components. A small currency appreciation would have virtually no effect toward cooling inflation. So while a small appreciation might be justified politically, it should not be used to fight inflation.

On the other hand, a major appreciation or revaluation could cool inflation by removing further currency appreciation expectations. It would trigger a hot money exit from China, creating a liquidity crunch that would almost certainly burst the property bubble. I doubt anyone would support such a policy move.

For China to achieve a soft landing from the current property bubble – if this is at all possible – interest rates must steadily increase by 2 percentage points in 2010, another 3 points in 2011, and further in 2012. Such a trajectory for interest rates would not burst the bubble, but it would prevent real estate interest rates from further declining in an atmosphere of rising inflation.

And insight on the real cause of Chinese trade surplus: that of suppressed consumption.

I am surprised that China is still running a trade surplus. …The surplus, I think, can be attributed more to distortions in domestic pricing than the currency’s cheapness.

First, high property prices are a major deterrent to middle class consumption…. But first-time buyers, such as newlyweds, have to save more to purchase property. Indeed, since prices are so high, parents have to save to help them…

Second, prices for middle class goods and services are very high. Autos stand out: Prices in China for cars, even those built domestically, are the highest in the world. …

Third, China’s taxes on the middle class are too high. The top marginal income tax rate of 45 percent applies at quite low income levels by international standards. The 17 percent VAT is also among the highest in the world. Because China tends to invest its tax proceeds, high taxes suppress consumption.

So to balance trade and boost consumption, structural changes in the economy is needed rather than tweaking the exchange rate. Yes, this will take a decade to bear serious fruit and won’t help those facing elections in November. Well, too bad. Life sucks.

Written by Cindy Luk

April 13, 2010 at 3:01 am

Is RMB revaluation imminent?

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The rumor mill has gone on a overdrive with speculation that the RMB is going to appreciate in the short term. Timmy’s surprise visit to Beijing is cited as a hint. After all, why would he make the trip if not to ask for more? Simply widening RMB’s trading band is seen as not enough to appease this time around.

There may be some truth in this reasoning, but one has to ask is China likely to agree? Even if they do decide to appreciate, how likely is that they will do it now? Bear in mind they’re due reporting the first trade deficit in 6 years, the Sino-US Stretegic & Economic Dialogue is coming up in May and US elections in November. Currency war is NOT going away, and they do have millions of jobs on the stake. Giving it all at the first request simply is not good negotiating technique.

All three members of the freshly minted members of the Monetary Policy Committee of the PBoC have given interviews lately. While they favor a more flexible exchange rate mechanism, they see the RMB to appreciate by 5% within the year at the most. Another adviser to China’s powerful planning commission predicts just 3% appreciation this year. Goh Chok Tong, the Senior Minister of Singapore and the chairman of its central bank comments publicly on the BoAo Forum (the Asian version of Davos for the non-initiated) today that it’s time for China to adopt a more flexible exchange rate mechanism. But the points to take home are the caveats:

The problem that the RMB is facing is not simply appreciation, of real importance is to change the existing exchange rate mechanism. The mechanism to peg tightly to the USD will hurt Chinese economy.

Now a small, paternalistic (some might even argue authoritarian) nation like Singapore doesn’t usually butt in the affairs of China. But there’s talk that China’s new mechanism will bring more currencies to the peg basket, a la Singapore.

So I stick to my earlier assessment that widening of the trading band is all Timmy’s going to show for his efforts this time around. An appreciation of 3%-5% may come anytime between May and November when the political heat from Washington becomes truly unbearable.

Written by Cindy Luk

April 9, 2010 at 6:51 pm

China to widen RMB’s trading band

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According to the Hong Kong Economic Times, a Chinese government think tank made a rare appearance yesterday during the press meeting held by the Foreign Ministry, focusing naturally on China’s exchange rate policy. A top policy adviser commented that:

As to whether to enlarge the trading band, or to revert to the pre-crisis policy of small-step appreciation, both are possible.

As I said before, I would bet on a widening of the trading band, as China’s trade deficit rules out the need for an immediate appreciation. The strength of the dollar of late has also muted European or Japanese complain on RMB. So basically lip service and no change at all unless, of course, inflation runs amok. China is due to release CPI data later this week, and consensus seem to be around 2.3%, well within the 3% government target. So inflation fear should be held off a bit longer.

As for the time-frame of policy change, the adviser hinted that it depends on the pace of recovery in the US. My take is that it’s likely to be part of a concerted tightening effort among the central banks, i.e. widening trading band plus possible interest rate hike. The upcoming Sino-American economic forum in May should be closely watched for any policy change.

Written by Cindy Luk

April 6, 2010 at 11:58 pm

Posted in China, Macro

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