Tag Archives: Yuan

China: currency manipulator or market forces?

A good summary from the FT – see video below. The Renminbi is permitted to trade 2 per cent on either side of a daily midpoint set by the People’s Bank of China (PBOC). This suggests that the PBOC still has significant control of the renminbi. Basically at 9.15am the Peoples Bank of China (Central Bank) and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate. The midpoint set by the PBOC on Monday of Rmb 6.9225 was the lowest since December, when trade tensions were last at fever pitch. The PBOC blamed the tariffs and trade protectionist measures on Chinese goods as the reason why the exchange rate has depreciated.

But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things

  • A significant bilateral trade surplus with the US.(Check! China’s got that.)
  • A material current account surplus of more than 3% of GDP.(China does not have that.)
  • Persistent one-sided intervention in its currency market.(China’s move on Monday doesn’t fit this bill, so no.)

But isn’t downward pressure on the Renminbi just part of the what happens to a currency when its economy starts to slow and it’s selling fewer exports.

Winners with a cheaper yuan
1. Chinese exporters are more competitive abroad.
2. Foreign consumers of Chinese products – imported products are more affordable.
3. China’s case for becoming a reserve currency could be bolstered by letting markets determine the exchange rate.

Losers
1. Chinese companies that have debt denominated in dollars, or buy things in dollars
like Chinese airlines, or other businesses that rely on imported oil.
2. Companies that compete with Chinese firms – including those in neighboring countries.
3. Companies that depend on exports to China – like the makers of luxury goods and mining companies.
4. Anyone worried about weak inflation in the U.S. or Europe

Sources: FT and Business Insider

Winners and losers from China currency depreciation

On Thursday last week the Chinese authorities cut the reference rate for Yuan against the US$. This cut was the third is as many days and the central bank of China put the yuan’s central parity rate at 6.4010 yuan for US$1, the China Foreign Exchange Trade System said, a drop of 1.11% from the previous day’s 6.3306. The currency can only trade 2 percent above or below the yuan’s central parity rate. Still, the visible hand of the state isn’t going to disappear completely.

Winners with a cheaper yuan
1. Chinese exporters are more competitive abroad.
2. Foreign consumers of Chinese products – imported products are more affordable.
3. China’s case for becoming a reserve currency could be bolstered by letting markets determine the exchange rate.

Losers
1. Chinese companies that have debt denominated in dollars, or buy things in dollars
like Chinese airlines, or other businesses that rely on imported oil.
2. Companies that compete with Chinese firms – including those in neighboring countries.
3. Companies that depend on exports to China – like the makers of luxury goods and mining companies.
4. Anyone worried about weak inflation in the U.S. or Europe

Yuan deprec

Source: New York Times

Is the Renminbi ready to become the Global Currency?

renminbiThere has been much talk of the Chinese currency the Renminbi becoming the reserve currency of the world. If you were to look at the trading volumes you would think that they are not far off the mark. However the growth has been so large in the last few years mainly because it has come from such a low base. But the following points put it in perspective:

* The Renminbi is the 7th most used currency according to SWIFT a global transfer system
* The Renminbi accounts for only 1.4% of global payments – US dollar is 42.5%
* When you look at assets open to international buyers there are just $0.3 trillion of Chinese assets available compared to $56 trillion of American – this is one reason why the US dollar is liked as a global currency.

For the Renminbi to become a more dominant it has to become global. An easy way for this to happen is for China to run trade deficits as this will add to the global holdings of Renminbi on a daily basis. However China has traditional run surpluses which means that more foreign currency is coming into the economy. On the other hand the USA has run trade deficits which in effect adds to the global holdings of US$. However even if China did run deficits what could the holders of Renminbi do with it? China could open the Capital Account of the Balance of Payments which would encourage investment. There is still a long way to go before the Renminbi becomes the reserve currency.

Straight trade for NZ$ and Chinese Renminbi

The NZ$ joined 5 other currencies that can be directly traded with the Renminbi (CNY) – the others being:

US Dollar – Japanese Yen – Malaysia Ringgit – Russian Rouble – Australian Dollar

What does it mean for trade:

There is now no requirement to exchange NZ$’s in the foreign exchange into another currency that is directly tradable (usually the US$) and then have to go back into the foreign exchange with that currency in order to obtain Renminbi. This will save importers and exporters foreign currency fees as well as one less transaction. However the losers will be foreign exchange dealers – interesting to note that John Key (former foreign exchange dealer) announced the deal last night during the first day of his visit to China. The diagram below shows the old system which requires double access into the foreign exchange. Under the new system arrows 1 and 2 will be removed and 3 will now be NZ$ going into the foreign exchange.
NZ$ - CNY

IMF reduces forecast for China’s trade surplus

The IMF have recently stated that they are going to reduce China’s long-term forecast for its current account from a surplus from 7% of GDP to 5% of GDP – to be published in the IMF’s magazine entitled – “The World Economic Outlook (WEO)”. This might be useful if you are going to indicate that your currency is actually undervlued.

From the Wall Street Journal

Since at least 2009, the IMF has been describing China’s currency as “substantially undervalued”—and before that it sought to use the term “fundamentally misaligned,” though Beijing blocked that designation. China’s government intervenes in the market to keep the currency from rising and thus endangering China’s exports. The higher the exchange rate, the more costly a country’s exports to foreign customers.

Since 2008, the IMF has consistently overestimated how large China’s current-account surplus would remain. IMF officials say that’s because the fund overestimated how quickly U.S., Europe and Japan would recover from the global financial crisis of 2008 and 2009 and underestimated how much China’s economy would change so it relied less on exports.

In 2007, China’s current-account surplus as a share of GDP peaked at 10.1%. In 2008, the IMF forecast it would stay close to 10% in the years ahead. That formed the basis of the argument that the yuan was “substantially undervalued” and years of diplomatic pressure on China to allow more rapid appreciation. In fact, China’s current-account surplus in 2011 came in at just 2.8% of GDP.

This change to the IMF’s estimate will assist China in convincing its critics that it need not let the currency fall much further.

Yuan to be a global currency

From the Wall Street Journal – the state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S. The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment.

“We’re preparing for the day when renminbi becomes fully convertible,” Li Xiaojing, general manager of Bank of China’s New York branch, told The Wall Street Journal. He said the bank’s goal is to become “the renminbi clearing center in America.”

Bank of China’s move comes at a time of U.S. pressure on China to let its currency rise in value. America has blamed an unfairly valued yuan for exacerbating the U.S. trade deficit with China. But the preparations for convertibility are also a sign of Chinese strength, as China, now the world’s second-largest national economy, recognizes that as a global power it must have a global currency. In time, a globally traded yuan could emerge as a store of value on par with the dollar, euro and yen.