NCM > Surprise, Communist China Pegs its Currency to the US Dollar
NCM > Surprise, Communist China Pegs its Currency to the US Dollar
Surprise, Communist China Pegs its Currency to the US Dollar
Sing Tao Daily, News Commentary, By Kam Tsang and Franz Schurmann, Aug 19, 2003
It’s pretty well known that in currency markets the U.S. dollar has fallen vis-a-vis Japan’s yen and the Eurpoean Union’s Euro. But it’s not that widely known that China’s Renminbi (RMB, aka Yuan) has also been falling. But the two fallings occur in sync with each other. The reason is that some years ago the Chinese Central Bank decided to “peg” the RMB to the USD.
All commercial paper has to be denominated in one or another currency. But in the case of international transactions the most popular currency is the USD. And despite the weakening of the dollar it still is overwhelmingly the currency of preference.
The Hong Kong Dollar (HKD) is also linked to the USD. But its “Linked Exchange Rate System” differs from the Chinese system in that Hong Kong has a free currency market whereas China doesn’t. But the difference may be smaller than it seems. The “Hong Kong Monetary Authority” in effect operates as a de facto central bank that keeps up a “linkage” of the HKD to the USD.
But falling currencies don’t necessarily mean failing currencies. If a country is a large-scale exporter. a depreciated currency can lead to an export bonanza. Not just China but the U.S. has also taken export advantage of its cheaper dollar.
Nevertheless American Treasury Secretary John Snow has asked China to float the RMB. That will mean an upward appreciation of the RMB. But so far China responds “no thank you.” Instead, while China already has US$316 billion in reserve, it is still actively purchasing yet more USD to stabilize the RMB's fully pegged exchange rate.
Japan responds differently. It is buying ever more goods and services at China’s bargain basement prices.
For Snow and other central bankers who had hoped for floating of the RMB, China’s continuance of its pegging the RMB to the USD is the exact opposite of what they had wanted to see.
During the 1997-98 East Asian currency crisis, there was a general concern that Beijing might devaluate the RMB. But the then Chinese Premier Zhu Rongji promised there would be no devaluation of the RMB: “China would do its part to get the world out of the currency crisis.”
And China kept its word. But what about now? China's official position is that for the foreseeable future, both its interest and exchange rates will stay as stable as possible. The Chinese Central Bank has a strict monetary policy to keep the fluctuation in the RMB exchange rate to the USD within one percentage point.
The strong RMB played a big role in defending China when the East Asian Currency Crisis hit it and Hong Kong. The downside, however, is that the very stable RMB has become an attractive hedge tool against currency fluctuations, detouring investors from traditional capital markets. As a result there is now a massive inflow of capital to China. This inflow is the reason why the global financial community sees China eventually adopting a system of floating exchange rates. That will be an intermediate step in China’s becoming a fully market-driven financial system.
Even given that the RMB's current low exchange rate is good for China's exports, both Chinese and foreign observers point out that China is still far from being a major player in the world economy. It still only contributes 5 percent of the world's total exports. That’s not insignificant, but compared to countries such as the United States and Japan, which contribute 30 to 40 percent of the world's total exports, China's part is relatively small..
But surprise, surprise, China has gained a powerful ally in its determination to keep its RMB pegged to the USD. The 1999 Nobel Economics laureate Robert Mundell, "father of the Euro," sings his praises of China's refusal to float the RMB. He goes even farther and calls for all Asian currencies eventually to be pegged to the USD as a first step in a grand plan for a common Asian currency.
Mundell also has a different take on the foreign capital amassing in China banks on the part of some global observers who see the tidal wave of money pouring into China as bets that the RMB will sooner or later be floated and soar upwards. And then these observers will be laughing all the way to foreign banks cashing in their bonanzas.
Instead Mundell holds that China will be able to sustain its current high economic growth over the next ten years, Furthermore, he adds 2008 will be the best time to make RMB convertible.
If Mundell is correct, then the speculators will have to wait five more years to get their profits to the bank. Others concede that the RMB is a currency of great potential, but also hold that inconvertibility is its biggest weakness. And they also note that the Japanese yen is convertible, but very volatile. Neither country so far holds the potential of a Pan-Asian common currency.
Yet surprises have occurred that have rattled markets. Who would have thought a decade ago that that China, ten years hence, would become a major player in world currency markets?
Kam Tsang is an engineer and a day trader.
Surprise, Communist China Pegs its Currency to the US Dollar
Sing Tao Daily, News Commentary, By Kam Tsang and Franz Schurmann, Aug 19, 2003
It’s pretty well known that in currency markets the U.S. dollar has fallen vis-a-vis Japan’s yen and the Eurpoean Union’s Euro. But it’s not that widely known that China’s Renminbi (RMB, aka Yuan) has also been falling. But the two fallings occur in sync with each other. The reason is that some years ago the Chinese Central Bank decided to “peg” the RMB to the USD.
All commercial paper has to be denominated in one or another currency. But in the case of international transactions the most popular currency is the USD. And despite the weakening of the dollar it still is overwhelmingly the currency of preference.
The Hong Kong Dollar (HKD) is also linked to the USD. But its “Linked Exchange Rate System” differs from the Chinese system in that Hong Kong has a free currency market whereas China doesn’t. But the difference may be smaller than it seems. The “Hong Kong Monetary Authority” in effect operates as a de facto central bank that keeps up a “linkage” of the HKD to the USD.
But falling currencies don’t necessarily mean failing currencies. If a country is a large-scale exporter. a depreciated currency can lead to an export bonanza. Not just China but the U.S. has also taken export advantage of its cheaper dollar.
Nevertheless American Treasury Secretary John Snow has asked China to float the RMB. That will mean an upward appreciation of the RMB. But so far China responds “no thank you.” Instead, while China already has US$316 billion in reserve, it is still actively purchasing yet more USD to stabilize the RMB's fully pegged exchange rate.
Japan responds differently. It is buying ever more goods and services at China’s bargain basement prices.
For Snow and other central bankers who had hoped for floating of the RMB, China’s continuance of its pegging the RMB to the USD is the exact opposite of what they had wanted to see.
During the 1997-98 East Asian currency crisis, there was a general concern that Beijing might devaluate the RMB. But the then Chinese Premier Zhu Rongji promised there would be no devaluation of the RMB: “China would do its part to get the world out of the currency crisis.”
And China kept its word. But what about now? China's official position is that for the foreseeable future, both its interest and exchange rates will stay as stable as possible. The Chinese Central Bank has a strict monetary policy to keep the fluctuation in the RMB exchange rate to the USD within one percentage point.
The strong RMB played a big role in defending China when the East Asian Currency Crisis hit it and Hong Kong. The downside, however, is that the very stable RMB has become an attractive hedge tool against currency fluctuations, detouring investors from traditional capital markets. As a result there is now a massive inflow of capital to China. This inflow is the reason why the global financial community sees China eventually adopting a system of floating exchange rates. That will be an intermediate step in China’s becoming a fully market-driven financial system.
Even given that the RMB's current low exchange rate is good for China's exports, both Chinese and foreign observers point out that China is still far from being a major player in the world economy. It still only contributes 5 percent of the world's total exports. That’s not insignificant, but compared to countries such as the United States and Japan, which contribute 30 to 40 percent of the world's total exports, China's part is relatively small..
But surprise, surprise, China has gained a powerful ally in its determination to keep its RMB pegged to the USD. The 1999 Nobel Economics laureate Robert Mundell, "father of the Euro," sings his praises of China's refusal to float the RMB. He goes even farther and calls for all Asian currencies eventually to be pegged to the USD as a first step in a grand plan for a common Asian currency.
Mundell also has a different take on the foreign capital amassing in China banks on the part of some global observers who see the tidal wave of money pouring into China as bets that the RMB will sooner or later be floated and soar upwards. And then these observers will be laughing all the way to foreign banks cashing in their bonanzas.
Instead Mundell holds that China will be able to sustain its current high economic growth over the next ten years, Furthermore, he adds 2008 will be the best time to make RMB convertible.
If Mundell is correct, then the speculators will have to wait five more years to get their profits to the bank. Others concede that the RMB is a currency of great potential, but also hold that inconvertibility is its biggest weakness. And they also note that the Japanese yen is convertible, but very volatile. Neither country so far holds the potential of a Pan-Asian common currency.
Yet surprises have occurred that have rattled markets. Who would have thought a decade ago that that China, ten years hence, would become a major player in world currency markets?
Kam Tsang is an engineer and a day trader.
posted by Eastlaw at Monday, July 04, 2005
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