Yuan and Won: Now This Is New

Author: Marc Chandler · December 5th, 2012 · RGE EconoMonitor

There has been much fanfare over the swap lines that China’s central bank has established with numerous countries. Many observers see those lines as evidence of the internationalization of the yuan and its increasing importance in the global economy.

We were somewhat more skeptical, recognizing that the swap lines were not being used. It seemed it was mostly about optics and less about substance.

However, earlier this week South Korea and China made an announcement that suggests a new and more substantive evolution. Essentially, China and South Korea indicated they will activate the swap line (KRW 64 trillion and CNY360 bln roughly equivalent to $59 bln). The purpose is to lend yuan and won to importers/exporters via banks to facilitate the settlement of bilateral trade flows.

The renminbi bloc is here: Asia down, the rest of the world to go?

Martin Kessler

Research Analyst, Peterson Institute of International Economics

Arvind Subramanian

Senior Fellow at the Peterson Institute for International Economics and Senior Research Professor at Johns Hopkins University

Arvind Subramanian, Martin Kessler, 27 October 2012, voxeu

As China becomes ever more important in the global economy, will its currency take on an international role? This column argues that in some sense, this is already happening – an increasing number of emerging-market currencies seem to track (co-move with) the renminbi – and the trend is set to continue.

The staggering economic rise of China in the last three decades leads to the question of the potential internationalisation of its currency, the renminbi (RMB). Internationalisation has different dimensions. An international currency is widely used in financial and trade transactions, and crucially it is used as a store of value. Some, like Eichengreen (2011) and Frankel (2011) see a potential global role for the RMB, provided important ancillary reforms to the domestic financial system and to the financial account first take place. In Eclipse, one of us projected that such a shift might happen in less than two decades (Subramanian 2011).

But there is a third dimension to an international currency: it serves as a unit of account or as a reference point for other currencies. We define a reference currency as one which exhibits a high degree of co-movement with other currencies. This co-movement could reflect either pegging choices by the government or be driven by market forces. In a new paper (Subramanian and Kessler 2012), we measure the co-movements of the US dollar, the euro, the RMB and the Japanese yen for a sample of 52 emerging market economies. We do that by following a methodology first applied by Frankel and Wei (1994): running a regression of each emerging market currency exchange rate (against the Swiss franc – which plays the role of a neutral numeraire) on this basket of four currencies (also against the Swiss franc). The coefficients on each of the major currencies are called “comovement coefficients” (CMCs), and measure the extent to which exchange rates movements are correlated with the four benchmark currencies.

Is China Still a ‘Currency Manipulator’?

Author: Ed Dolan · October 24th, 2012 · RGE EconoMonitor

“On day one, I will label them a currency manipulator.” So spoke Mitt Romney during Monday’s Presidential debate, threatening, as he has innumerable times, to hit China with new tariffs if it doesn’t stop using a cheap yuan to steal U.S. jobs. But does the label still fit?

We all know the story by heart. Without intervention by China’s central bank, market forces would push the value of the yuan higher, making it easier for U.S. producers to compete with Chinese goods. Instead, the People’s Bank of China (PBoC) manipulates the exchange rate by making massive purchases of U.S. dollars for its foreign exchange reserves. The result: huge current account surpluses that enrich China’s politically powerful exporters at the expense of American workers. If we just had a president with the courage to tell them to stop, we could get America moving again.

Unfortunately, although it still sounds great in a stump speech, the story may be out of date. Let’s look at it piece by piece.

Exchange rates

First, what’s been happening with exchange rates? The first chart below shows the closely-watched nominal bilateral exchange rate of the dollar vs. the Chinese yuan (or renminbi, if you prefer the official name). For most of the past two years, the yuan has been appreciating relative to the dollar. The more U.S. importers have to pay for each yuan, the more expensive Chinese goods become for American consumers, and the cheaper American goods become for Chinese buyers. So far, so good.

The next chart shows a version of the exchange rate that is more important for China—the so-called Real Effective Exchange Rate (REER). It differs from the nominal yuan-dollar exchange rate in two ways. First, it is adjusted for differences in inflation rates between China and its trading partners. Inflation can make a big difference for international competitiveness. Second, it is a weighted average of exchange rates with the dollar, the euro, the yen, and all of China’s trading partners. The REER gives a broader picture of the overall competitiveness of the Chinese economy. It, too, has been appreciating, with some ups and downs, over much of the past several years.

Appreciation of the yuan is what you want if you are interested in selling goods to China or competing with goods from China. So far so good. But a closer reading of the charts suggests that not all is well for U.S. and European exporters and import-competitors.

The End of China’s Easy Growth

The more we learn about China’s vast stimulus plans, the more far-fetched they seem.

Xiluodu Dam is seen under construction across the Jinsha River near Yongshan, Yunnan, China. Photo: Adam Dean

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By Ambrose Evans-Pritchard, The Daily Telegraph

16 Sep 2012

 

Caixin magazine reports – with disbelief – that the wish-list for industrial parks and mega-projects unveiled by all echelons of the Chinese system has reached 15 trillion yuan by some estimates.

This is over $2.3 trillion or nearly four times the blitz of extra spending after the Lehman crisis in 2008, a policy that pushed investment to a world record 49pc of GDP and is now deemed to have been a mistake.

But as Caixin also reports, the authorities are running out of easy money. Land transfer fees for the 300 largest cities have fallen 38pc over the last year.

The central government’s tax revenues have grown 8pc, but spending has risen 37pc. “The good days of overflowing government coffers are over,” it said.

Yuan Is Luring Bets of a Drop .

Date: 28-08-2012
Source: The Wall Street Journal

Investors, long enamored with the yuan, have increasingly soured on the Chinese currency and are boosting their bets that it will decline against the dollar in coming months.

The yuan is down almost 1% against the dollar this year, and a full-year decline would be the first for the Chinese currency since China ended a decadelong peg against the dollar in 2005. The yuan has surged since then, including a 4.5% rise last year, and many investors had expected the appreciation would continue.

The yuan remains tightly controlled by Beijing, which sets the rate every day. In April, the government widened the band in which the yuan could trade each day to 1% on either side of the official rate, from 0.5%. That move, part of the government’s slow-motion effort to liberalize its currency, gave investors slightly more influence over the value of the currency.

But a slowing Chinese economy and a decision by the central bank to loosen its tight control over the currency have driven this year’s decline. Many investors who had been betting that the yuan would rise have reversed their positions.

“Bets on the depreciation of [yuan] are gaining momentum,” said Wee-Khoon Chong, Asia rates strategist at Société Générale in Hong Kong.

China Shifts Course, Lets Yuan Drop .

Date: 25-07-2012
Source: The Wall Street Journal

BEIJING—China’s central bank is starting to guide the yuan downward against the dollar after two years of trying to boost its value, reflecting concern in Beijing over China’s slowing economy and risking a political fight with the U.S.

The People’s Bank of China guided the Chinese currency to its weakest level of the year on Wednesday against the U.S. dollar, the third straight day of a push to bring down the yuan’s value. Overall, the yuan has fallen 1.1% against the dollar this year after rising 4.7% against the U.S. currency last year.

PBOC didn’t respond to requests for comment, and it isn’t clear whether the trend will continue in coming days and weeks.

Traders and analysts say the change is aimed at helping exporters cope with slowing sales and reducing the chances of major layoffs ahead of a major—and sensitive—once-a-decade Chinese leadership change set to begin later this year. A cheaper yuan makes Chinese goods less expensive in dollar terms.

Chinese Premier Wen Jiabao last week warned that “the task of promoting full employment will be very heavy and we must make greater efforts to achieve it.”

China Loosens Grip on Yuan

Date: 16-04-2012
Source: The Wall Street Journal

Central Bank Widens Currency’s Trading Range; Move Could Ease Trade Tensions

BEIJING—China made one of its strongest moves yet to show that it believes the yuan is ready to become a global currency by loosening daily trading limits.

The move to widen the currency’s trading range, which went into effect Monday, doesn’t eliminate Beijing’s tight grip on the yuan. China’s central bank still sets a daily reference rate for its currency. On Monday in China, the yuan opened modestly weaker in currency trading, after the central bank set a reference rate for the yuan stronger than Friday’s market close.

Companies and investors are bracing for the expected greater volatility in the yuan’s exchange rate. Until recently, most businesses and investors had viewed the yuan as a surefire bet to rise in value, but that view has changed as China’s trade surpluses have declined

Japan, China Deepen Financial Ties

Date: 26-12-2011
Source: The Wall Street Journal

The Chinese and Japanese governments on Sunday unveiled a broad, innovative package of financial agreements designed to tighten ties between the world’s second- and third-largest economies, moves that could elevate the yuan’s status as an international currency and solve foreign-exchange headaches for Japanese companies doing business in China.

The policies also are aimed at reducing the use of U.S. dollars in trade between the two countries, possibly curbing the American currency’s role in the world’s fastest growing region.

The agreements include a plan for a Japanese government-backed entity to sell yuan-denominated bonds in China, a boost to Beijing’s campaign to deepen its domestic capital markets. Other measures are designed to make it easier for companies to convert the Chinese and Japanese currencies directly into the other, without requiring an intermediate conversion into dollars, the current common practice. About 60% of all Japan-China trade is currently settled in American dollars, according to a Japanese government official who briefed reporters on the agreements.

Trade, Trial Balloons, and the Yuan

Casey Dispatch, 13/7

By Kevin Brekke

Just when the dust-up surrounding fraud allegations against Sino-Forest looked to have slipped off the front page ,we got hit with another “sino” announcement last week: China released its trade numbers for June. They showed a surplus of $22.3 billion – considerably wider than anticipated - and smashed consensus estimates.

China registered a trade deficit in the first quarter of this year, the first such occurrence in seven years. The quarterly deficit yielded some temporary cover for Chinese officials against the chronic calls by U.S. officials for further yuan appreciation. However, the deficit appears to have been a one-off event as a surplus re-emerged in roaring style in April and remained positive in every month since.

Like so many of today’s governments, China is struggling to attain a balance among many competing fiscal and economic forces. Often, policies used to tackle one area will aggravate another area. In particular, the juggling act between maintaining sufficient GDP growth to ensure ample job creation while also keeping inflation in check is now looking a little shaky.

One Year Later, How Much has China’s Yuan Appreciated?

Author: Ed Dolan · June 13th, 2011 · RGE Economonitor

A year ago this week China announced a major change in its exchange rate policy. After holding the yuan-dollar exchange rate fixed for almost two years during the global crisis, the country’s central bank, the People’s Bank of China (PBoC) announced that the yuan would once again be allowed to float, albeit in a highly controlled way. The yuan began appreciating against the dollar immediately, touching off intense speculation about how far it would be allowed to move. A year later, what has happened?

The yuan-dollar exchange rate is a highly sensitive issue in both countries. Many politicians and pundits in the United States blame China for high U.S. unemployment, a slow recovery from the Great Recession, and a persistent trade deficit. The economics profession is a little more reserved. Many economists point out that a stronger yuan would not necessarily work magic for the U.S. economy. An appreciation of the yuan alone could simply lead to re-sourcing of imports, buying them from Vietnam, Bangladesh, India or elsewhere, in which case there would be no automatic closing of the U.S. trade gap. Still, econometric studies by and large have supported the notion that the yuan had been undervalued relative to the dollar, probably by 20 to 40 percent, at the time China’s policy shift was announced.