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DAVOUT
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AUERSTADT
Jun 2002
time: 05:29
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This is a simplified analysis of the subject; is it correct?
China has a foreign trade with a positive balance.
Chinese exporters billing in dollars receive dollars that they change against Yuans through the BoC at the fixed rate of 8.28 Yuans for 1 $. The BoC, once it has covered its need in cash $ and provided for the payments of foreign investments or reimbursement of previous loans, has now an assets with no yield. Then the BoC buys US bonds so that this asset will not be sterile. We remind that a few years ago, there was an epidemic amongst the central banks which were selling their gold in order to buy bonds instead; the BoC is on this line of though. It is not their buying of bonds which reinforce their currency; it is their positive trade balance.
Now, lets assume that they accept to revaluate the Yuan by 20% (6.62Yuans for 1 $). The Chinese exporters billing in $ will quickly increase their prices in order to get the same amount of Yuans than before; this will causes a decrease in the volume of sales which will reduce the positive foreign trade balance, and the amount of dollars (converted in bonds) monthly accumulating in the coffers of the BoC. Correlatively, this effect will be partly offset by the decrease in price of imported goods billed in dollars. One step further, the reduction of the cost of imported goods will be partly reflected in the cost of exported goods then in their price in $, the increase of which being finally smaller than the revaluation. We see that a revaluation does not suffice to revert the trend of a currency to be reinforced by a consistent positive trade balance.
There are two possibilities to stop the increasing stockpile of foreign currency held by the BoC : one is to make foreign investments (not bonds), but there is so much to do in China that we cannot imagine a foreign investment policy launched by the Chinese anytime soon; the other is to increase the imports either in machine, equipments and structural facilities or consumer products.
Overall, it is easy to understand that the Chinese government is not in a hurry to modify anything to the current situation which lets open all possibilities.
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DAVOUT
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AUERSTADT
Jun 2002
time: 05:29
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quote:
Originally posted by Kidicious
Their trade balance does strenghten their currency, but they devalue their currency by reinforcing the dollar.
There would still be a positive trade balance. It just wouldn't be as large. The BoC would still stock pile US bonds.
Is your point that revaluing the Chinese currency will not slow the increase in their currency reserves?
No, but other nations have a great interest in getting them to revalue, especially the EU. |
I dont see how buying bonds with dollars on hand could reinforce the $, and if it does I dont see how it weakens the Yuan which has a fixed rate of conversion.
I am not advocating anything, I just wanted to understand why some are asking for the Yuan to revalue, and what would be the effects of a revaluation. Yes my point was that, anything remaining equal, a revaluation would not prevent the Yuan to keep reinforcing, and that China has no clear interest to do so right now.
As for the EU, I am not sure that the trade between the EU and China is so big that it is a special problem; our exports are probably billed in $, and we are not in competion with them, but with ... the US on this market.
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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:29
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quote:
Originally posted by DAVOUT
I dont see how buying bonds with dollars on hand could reinforce the $, and if it does I dont see how it weakens the Yuan which has a fixed rate of conversion..
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Chinese investment in the US goes hand in hand with their exportation of goods to the US. The BoC reinforces the dollar against the Yuan by buying dollars on the forex to peg the value of the Yuan to the dollar.
quote:
Originally posted by DAVOUT
I am not advocating anything, I just wanted to understand why some are asking for the Yuan to revalue, and what would be the effects of a revaluation.
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Because the current value of the Yuan makes it easy for them to export goods, and it makes it harder for other nations to export goods to them. I believe it is against WTO regulations too.
quote:
Originally posted by DAVOUT
Yes my point was that, anything remaining equal, a revaluation would not prevent the Yuan to keep reinforcing, and that China has no clear interest to do so right now.
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Correct. China does not want to revalue. They like to export.
quote:
Originally posted by DAVOUT
As for the EU, I am not sure that the trade between the EU and China is so big that it is a special problem; our exports are probably billed in $, and we are not in competion with them, but with ... the US on this market. |
I've heard otherwise. Your trade with China isn't as large as that of the trade between China and the US, but that could change if your currency keeps getting stronger compared to the dollar.
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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:29
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Here's a new article on it from the Japan Times. Read there is an international coalition forming (including European nations) to convince China to remove the peg.
China under more pressure to revalue the yuan
quote:
China under more pressure to revalue the yuan
Japan, U.S. argue that unfairly low exchange rates are spreading deflation, trade deficits
Japan and the United States are stepping up calls on China to revalue the yuan, charging that while growing economically, it is spreading deflation and trade deficits by exporting goods at an unfairly low exchange rate.
But Beijing is showing no signs of yielding, and says Chinese exports do not have a decisive impact on world prices.
"No country in the world makes currency adjustment decisions based on the international situation alone without analyzing its domestic situation," Chinese Minister of Commerce Lu Fuyuan told the fifth Asia-Europe Meeting of Economic Ministers in Dalian last week.
At the ASEM Finance Ministers' gathering in Bali two weeks earlier, European countries agreed that the yuan's current exchange rate does not reflect the real strength of the Chinese economy. That suggests cheap Chinese goods are also flooding European countries.
China accounted for 19 percent of Japan's imports in June and 23 percent of the U.S. trade deficit in May, dragging down domestic prices in both countries.
Tokyo first called for a revaluation of the yuan, which is effectively pegged to the dollar.
In an article that appeared in a British newspaper in December, Haruhiko Kuroda, then vice finance minister for international affairs, said China is exporting deflation. Finance Minister Masajuro Shiokawa has agreed, saying Beijing must allow its currency to appreciate.
But many observers say Japan, unable to find an effective way to fight domestic deflation, has singled out China as its whipping boy.
Wu Chunhua, a senior analyst at Japan Research Institute, noted that imports from China account for only about 1 percent of Japan's gross domestic product.
"Can it be said that China is the root cause of deflation?" Wu asked.
"I don't buy the argument that China is moving prices in Japan," said R. Glenn Hubbard, former chairman of the U.S. presidential Council of Economic Advisers.
The situation is more or less the same in the United States.
U.S. manufacturers, hit hard by cheap Chinese imports such as clothing and home appliances, are calling on the administration to take measures to stem the inflow.
By criticizing China for creating "deflationary pressure," the administration believes it can obtain support from other countries without being viewed as protectionist.
"The 'China is a bad guy argument' is the administration's grand tactic to win the presidential election" next year, one economist said.
The situation on the Chinese side is also complicated.
Beijing can ill afford to revalue the yuan because that would not only slacken its export-led high economic growth but also make manifest the country's bad loans, estimated to account for as much as 20 percent of Chinese GDP.
This would force the government to streamline inefficient state-run corporations and deal with other economic problems, including a sharp rise in unemployment.
On the other hand, some Chinese business leaders are calling on the government to revalue the currency to lure foreign investment.
Under the circumstances, the Chinese government will revalue the yuan "gradually" beginning next year, said Chi Hung Kwan, a senior fellow at the Research Institute of Economy, Trade and Industry.
But if other countries intensify their pressure on Beijing, it would arouse opposition among Chinese people, making it difficult for the government to revalue the currency, Kwan added.
The Japan Times: July 31, 2003
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MattyBoy
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Pekka Fan Club
Jun 2001
time: 15:29
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Good timing, as I was just wondering about this last night. I was told that the Yuan is exchangeable with foreign currencies but the Renminbi is not. I would love to know how to find out more about China's restrictions on fx trading and share ownership by foreigners.
Presumably a fixed currency presents an arbitrage opportunity, because trading at anything other than the current consensus fair value favours one side of the trade over the other. A smart arbitrageur should be able to find a way of getting on the side of the USD-Yuan trading that is favoured by the unfairly priced exchange rate. Then they can just crank up the trading volume to increase their profits.
What am I missing?
As for the WTO, I recently read (in their explanatory documents) that they now strongly discourage restrictions on trade flows as well as fixed exchange rates.
One disadvantage of fixed rates not mentioned so far is that parties in the business of investing or trading via fixed exchange rates face an impossible modelling problem. This is because they have no indication of how the exchange rate is likely to change going forward. History suggests that the exchange rate will be exactly what it is now, but there is always a chance that it will have been revalued to a drastically different rate.
i.e: If you are committed to a future trade using a market-driven exchange rate, you can look at how volatile it has been to estimate its future behaviour. However, if you need to exchange Yuan for dollars at some point in future, the current flat exchange rate gives you no indication of what the future holds. Hence, under fixed exchange rates any change will wreck havoc on many investors, as they have been unable to effectively hedge their risks.
The above discussion covers volatility modelling under fixed exchange rates, but the same concerns also apply to correlations of fixed rates with other variables.
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yavoon
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seems like a good scheme. but didn't the japanese also try to keep their currency devalued as long as possible?
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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:29
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Good points MattyBoy. I don't know how the Yuan trades or what strategies should be used. But I would be interested in finding out. It seems to me that traders would try to get a hold of all the Yuan they can since it is assumed to be undervalued.
edit: I guess there is a limit though. What if the currency never gets revalued, but eventually gets loses value. Still it seems like a good buy.
Last edited by Kidicious on 31-07-2003 at 11:55
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Tingkai
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To find the Northwest Passage
Aug 2001
time: 13:29
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Davout: you ask some good questions, and got some really bad answers. So me try to give some decent answers. It's 1am in HK so I won't cover everything.
The first thing is you were right when about this.
quote:
Originally posted by DAVOUT
Chinese exporters billing in dollars receive dollars that they change against Yuans through the BoC at the fixed rate of 8.28 Yuans for 1 $.
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The rmb (same thing as yuan) can essentially only be changed through the BOC. There is NO open market trading of the rmb (what Kidacious said is wrong)
Let's say you take some products into China and sell them and get 100,000 rmb. Chinese law requires you to go through the BoC to change the money into US$. You cannot wire the money out of China because no one will do it because it is illegal.
You won't take the actual cash out because customs will confiscate if you try and besides what are you going to do with RMBs in the US.
If you want to sell the rmbs on the black market. You say to someone, I'll pay 6 rmb for your US$1. The guy with the US money will say forget it, because he can go to the Boc and get 8.28 rmb for his US$1.
If I have US$ and you say to someone, give me 10 rmb and I'll give you US$1, the guy will say forget it because he can buy the US$1 for 8.28 rmb (of course there will be minor service charges for exchanging the money).
Your next statement is wrong.
quote:
Originally posted by DAVOUT
The BoC, once it has covered its need in cash $ and provided for the payments of foreign investments or reimbursement of previous loans, has now an assets with no yield.
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Currencies have a yield. About a year ago, if I had US$100, I could have changed into 100 euros. Now, a year later, the exchange rate has changed. I can take that 100 euros and change it into US$112. I have now made a profit of US$12.
It is highly likely that China has done this. An important thing to remember is that China's foreign reserves are not in US$, the reserves are valued. China likely had billions of euros (we don't really know because the exact holdings are state secret). As the value of the euro increased, China would have sold the euros for US$ thereby increasing the US$ value of its reserves.
Alternatively, a year ago, as the euro rose against the US$, China may have sold its US$ holdings on the belief that the Euro would continue to strengthen. This would have pushed the US$ value down. China can now sell the euros at a profit, but of course this can't continue forever because by selling euros for US$, China helps push of the value of the US$.
quote:
Originally posted by DAVOUT
Now, lets assume that they accept to revaluate the Yuan by 20% (6.62Yuans for 1 $). The Chinese exporters billing in $ will quickly increase their prices in order to get the same amount of Yuans than before;
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Maybe yes, maybe no, depends on how you look at it.
Let's say a Chinese company is selling widgets to an American company at a price of US$1 (which equals 8.28rmb). Then the rmb is revalued at 6.62 rmb=US$1. The Chinese business may try to raise his US$ price so that he still gets 8.28 rmb. In this case, his US$ price has increased, but his rmb price, and the volume of his sales in rmb, is still the same.
It is possible that the US buyer is willing to accept the higher US price in which case there is no change in the foreign trade balance, but it is probably more likely that you are correct in saying.
quote:
Originally posted by DAVOUT
this will causes a decrease in the volume of sales which will reduce the positive foreign trade balance, and the amount of dollars (converted in bonds) monthly accumulating in the coffers of the BoC.
Correlatively, this effect will be partly offset by the decrease in price of imported goods billed in dollars.
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quote:
Originally posted by DAVOUT
One step further, the reduction of the cost of imported goods will be partly reflected in the cost of exported goods then in their price in $, the increase of which being finally smaller than the revaluation. We see that a revaluation does not suffice to revert the trend of a currency to be reinforced by a consistent positive trade balance.
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No, you're assuming a market in which there are only US buyers and Chinese sellers.
Let's say producing widgets in China costs $7.50 rmb and the widgets sell for U$1. The Chinese company is making a profit (US$1 exchanged into 8.28 rmb is a profit of .78 rmb.
Then the rmb appreciates by 20%. I don't want to do the math, so let's just say the Chinese firm now needs to charge US$1.10 just to cover his costs. But a company in Thailand is willing to sell widgets for US$1.05. The Chinese company can't match that price because the company would be selling at a loss. So the Thai company gets the contract.
It is possible that Chinese companies lose so many contracts that exports drop that China ends up in a trade deficit.
quote:
Originally posted by DAVOUT
There are two possibilities to stop the increasing stockpile of foreign currency held by the BoC : one is to make foreign investments (not bonds), but there is so much to do in China that we cannot imagine a foreign investment policy launched by the Chinese anytime soon;
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No, if China has US$1 billion in foreign reserves, that money can only be invested outside of China. The government can't pay workers US$ because the workers will simply go to the BoC and change it back into RMB and the BoC ends up with US$ again.
Although you are correct that the Chinese government could buy foreign machinery and bring it into China, which would be an internal investment.
The BoC may also be buying US stocks, but is more likely taking a conservative approach of buying US bonds.
quote:
Originally posted by DAVOUT
Overall, it is easy to understand that the Chinese government is not in a hurry to modify anything to the current situation which lets open all possibilities. |
Yes, and the big thing is that a re-evaluation could price Chinese companies out of the international market.
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29-07-2003 21:11
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