Posted by hkarner - 7. März 2014
Source: The Economist
Why China’s central bank is weakening its currency
CHINA’S currency has long been a source of controversy, especially among American politicians outraged by its cheapness. But it is rarely a source of uncertainty. Critics have argued fiercely about what it should be worth. But as to what it would be worth, China’s authorities have left little room for disagreement. For much of its history it has been pegged tightly to the dollar. More recently it has floated within a narrow band (now 1% either side of a benchmark fixed each morning by the central bank). Most people have assumed it would float upwards.
In recent days, however, China’s authorities have tested that assumption. At a two-day meeting ending on February 18th, the central bank decided to weaken the yuan, according to the Wall Street Journal. It has lowered its benchmark by a smidgen at a time for several days. The currency has also fallen from the strong side of its band to the weak side. In the space of a few days, it lost about 1% of its value. On February 26th China’s foreign-exchange regulator said that China’s ongoing exchange-rate reforms meant that “two-way fluctuations… will become the norm”.
For the past year, a different norm has applied: the fluctuations have been mostly one way. China enjoys a sizeable current-account surplus and it still attracts more foreign-direct investment than it provides. Other kinds of capital flows are more volatile. But in the last quarter of 2013, a net $22 billion of “hot money” flowed inwards. Much of this qualifies as a “carry trade”: speculators have borrowed cheaply in dollars, then lent in yuan, eluding China’s capital controls in the hope of benefiting both from higher Chinese interest rates and the yuan’s appreciation.
All of this has put upward pressure on the currency, fulfilling the carry-traders’ designs and inspiring others to emulate them. Despite the central bank’s heavy purchases of foreign exchange, the yuan rose by 2.8% against the dollar in the year to January, even as the currencies of other emerging markets plummeted. The resulting loss of competitiveness is best illustrated by an index calculated by the Hong Kong Monetary Authority, which compares China’s currency with those of other emerging economies that compete with it in third markets (the countries China trades “against”, not necessarily the countries it trades “with”). This index shows the yuan rising by over 13% in the year to January and by almost 2.6% in January alone (see chart).
China’s authorities did not say they had stepped in to sap the yuan. But their intervention left fingerprints all over the money markets. In buying dollars to weaken the currency, the monetary authorities (and their accomplices, the state-owned banks) put additional yuan into circulation. The central bank withdrew a fraction of this extra money by selling securities to the banks. But the banks were still left with extra yuan, which they tried to lend to each other. This pushed down interbank interest rates, despite the central bank’s withdrawals. As Yao Wei of Société Générale points out, “No factors other than foreign-exchange intervention seems able to explain that.” Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: Central Banks, china, currency, Economist, Yuan | Leave a Comment »
Posted by hkarner - 10. Dezember 2013
Jeffrey Frankel (Harvard Kennedy School), 6 December 2013. voxeu
Except for the period 1992-2000, the dollar’s role as an international currency has been slowly declining since 1976. Since 2010, there has been another pause in this decline – somewhat surprising, given that the financial crisis began in the US, and given Congress’ recent flirtations with default. The dollar’s resilience as the world’s reserve currency is due to a lack of good alternatives – the euro has its own problems, and the yuan only accounts for 2.2% of forex transactions.
As most people know, the general trend in the dollar’s role as an international currency has been slowly downward since 1976. International use of the dollar as a currency in which to hold foreign-exchange reserves, to denominate financial transactions, to invoice trade, and to serve as a vehicle for foreign-exchange transactions is below where it was during the heyday of the Bretton Woods era (1945-1971). However, few are aware of what the most recent numbers show.
It is not hard to think of explanations for the downward trend:
- Since the time of the Vietnam War, US budget deficits, money creation, and current-account deficits have often been high.
Presumably as a result, the dollar has lost value in terms of other major currencies and in terms of purchasing power over goods. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: currency, Dollar, Finanzkrise, Frankel, voxeu, Yuan | Leave a Comment »
Posted by hkarner - 6. Dezember 2012
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.
Posted in Artikel | Getaggt mit: china, currency, RGE Monitor, Yuan, Zinsswap | Leave a Comment »
Posted by hkarner - 27. Oktober 2012
Research Analyst, Peterson Institute of International Economics
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. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, currency, Peterson, Yuan | Leave a Comment »
Posted by hkarner - 25. Oktober 2012
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.
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. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, currency, Dolan, RGE Monitor, Yuan | Leave a Comment »
Posted by hkarner - 19. September 2012
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
<!– remove the whitespace added by escenic before end of tag –>
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. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, Evans-Pritchard, Telegraph, Yuan | Leave a Comment »
Posted by hkarner - 28. August 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. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, WSJ, Yuan | Leave a Comment »
Posted by hkarner - 27. Juli 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.” Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, currency, Euro, USA, WSJ, Yuan | Leave a Comment »
Posted by hkarner - 16. April 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 Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: china, IMF, WSJ, Yuan | Leave a Comment »
Posted by hkarner - 27. Dezember 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. Den Rest des Beitrags lesen »
Posted in Artikel | Getaggt mit: Bonds, china, currency, Japan, WSJ, Yuan | Leave a Comment »