01-08-2003 03:21									#31
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quote: Originally posted by Tingkai 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$, China helps push of the value of the US$.

Thanx for the info we were missing.

You are wrong on the account of the BoC stockpiling Euros though in exchange for dollars. If the BoC were to sell dollars they would weaken the dollar. Since the Yuan is pegged to the dollar they would simply have to buy those dollars back to keep the peg.

It is natural for China to have a large reserve of dollars because of the positive trade ballance with the US. The last thing that China wants is for the dollar to fall any more than it already is because it would decrease the value of their reserves. The BoC is not interested in selling dollars, I assure you that.

	01-08-2003 05:05									#32
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quote: 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.

Thanks, Tingkai. This was the kind of information I was hoping to find out. It is obvious how a fixed rate fails to work in an open market, but I am interested to learn more about how the fixed rate + exchange controls approach works.

	01-08-2003 05:53									#33
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I'm still unclear on how the Chinese buy dollars. With Yuan? Then isn't the Yuan traded externally?

	01-08-2003 13:13									#34
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quote: Originally posted by Kidicious I'm still unclear on how the Chinese buy dollars. With Yuan? Then isn't the Yuan traded externally?

They certainly dont want to create an external market for the Yuan, but through their foreign trade they receive $ AND Yens. Selling Yens against $ is a possibility.

	01-08-2003 15:06									#35
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The subject is becoming hot on the Hill !

http://www.reuters.com/newsArticle.jhtml;jsessionid=UMNGHAYQI4F2ICRBAEZSFEY?type=reutersEdge&storyID=3198715

	01-08-2003 16:28									#36
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quote: Originally posted by MattyBoy Thanks, Tingkai. This was the kind of information I was hoping to find out. It is obvious how a fixed rate fails to work in an open market, but I am interested to learn more about how the fixed rate + exchange controls approach works.

The short answer is, if you want to sell or buy lots of RMB, you have to have the paperwork to explain why you are doing it. You can't walk into a BoC bank and say "Here's US$100,000, I'd like to have 880,000 rmb."

Importers/Exporters need to have paperwork explaining their need for currency exchange.

Mainland Chinese are only allowed to carry out X amount of rmb when they travel abroad.

When a foriegn company sets up shop on the Mainland, there are rules about how much money they can take out.

Mainland companies operating overseas have been told to repatriate all of their capital reserves held overseas.

The regulations constantly change so the above are just general ways that the Chinese government controls its currency.

	01-08-2003 16:30									#37
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quote: The law creating the People s Bank of China (Central Bank) gives the definitions :

Within China the terms renminbi and yuan are used interchangeably (along with kuai here in Shanghai).

	01-08-2003 16:39									#38
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quote: Originally posted by Kidicious You are wrong on the account of the BoC stockpiling Euros though in exchange for dollars. If the BoC were to sell dollars they would weaken the dollar. Since the Yuan is pegged to the dollar they would simply have to buy those dollars back to keep the peg.

You're still assuming that the rmb is freely traded, which it is not. Because it is not freely traded, the Chinese government does not need to buy US$ to keep the peg.

Before you start going about how I am wrong, how about you give a full explanation about your statement above.

quote: Originally posted by Kidicious The last thing that China wants is for the dollar to fall any more than it already is because it would decrease the value of their reserves. The BoC is not interested in selling dollars, I assure you that.

No. Let's say China's foreign reserves consist of US$1,000 and 100 euros. If the exchange rate is US$1=1 euro then China has a foreign reserve valued at US$1,100.

If US$ falls and the exchange rate becomes US$1=1.10 euros then China's foreign reserve is now US$1,110 (US$1,000 plus the 100 euros that are worth US$110).

So any fall in the value of the US dollar increases the value of China's foreign exchange if that value is stated in US$ terms, which it traditionally is.

Furthermore, if China perceives the US dollar as being weak and unstable, then it will want to switch to the stronger euro. If it ever needs US dollars then it can buy them at a later date, and a cheaper rate (assuming the US$ continues to fall relative to the euro).

So China very much has an incentive to switch its foreign reserves from US dollars to euros or any other strong currency or asset (eg, gold, stocks, Canadian government bonds, whatever).

	01-08-2003 18:35									#39
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Tingkai,

I desagree with your definition of a yield for the currencies. What you describe is a speculation which can work or not. Central Banks do not speculate with the reserves, but they are interested in having them producing a small income without risk; it is the reason why many central banks sold their gold, a couple of years ago, against US$ ultimately converted in US bonds. The BoC had a very small amount of gold (578.7 tons) representing less than 2% of their total reserves at the end of 2002, demonstrating their preference for reserve producing no risk income.

When central banks are shifting their reserves from one currency to another, it is for policy reasons, with long term views, not for cashing a windfall profit.

Last edited by DAVOUT on 01-08-2003 at 18:48

	01-08-2003 18:46									#40
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quote: Originally posted by DAVOUT Tingkai, I desagree with your definition of a yield for the currencies. What you describe is a speculation which can work or not.

Exactly. Yield is something you get for credit and interest rate, not FX risk.

	01-08-2003 18:47									#41
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Tingkai,

I am not assuming a market in which there are only US buyers and Chinese sellers, and the reduction of the Chinese positive balance that I anticipated in my post is obviously due to the turnover lost by the Chineses and won by the competition. And the Chineses buyers will enjoy the reduction of their costs for all their purchases coming from all countries.

Regarding the investments in foreign countries, I was not referring to the Chinese government paying US workers of course, but to private Chinese companies authorized to build factories abroad. Even if not likely in an immediate future, THIS can be contemplated as a way to reduce the stockpile of US $.

	01-08-2003 22:56									#42
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quote: Originally posted by DAVOUT Tingkai, I desagree with your definition of a yield for the currencies. What you describe is a speculation which can work or not. Central Banks do not speculate with the reserves, but they are interested in having them producing a small income without risk; it is the reason why many central banks sold their gold, a couple of years ago, against US$ ultimately converted in US bonds. The BoC had a very small amount of gold (578.7 tons) representing less than 2% of their total reserves at the end of 2002, demonstrating their preference for reserve producing no risk income. When central banks are shifting their reserves from one currency to another, it is for policy reasons, with long term views, not for cashing a windfall profit.

I agree that Central Banks are conservative investors, but I disagree that they do not speculate, or at least not the ones in Asia. Information about what the BoC does is limited, but look at the Hong Kong Monetary Authority. They are very conservative investors, but they do seek to make money on the reserves.

"The Annual Report contains the audited Exchange Fund accounts for 2002. The investment return on the Fund in 2002 was 5.1%, which was 120 basis points higher than the return on the benchmark set for the Fund by the Exchange Fund Advisory Committee." -- HKMA 2002 annual report.

The exchange fund is the Hong Kong government's foreign reserves (edit: to be more specific, this is the money that backs the HK$) , plus fiscal reserves.

Singapore does the same thing with its fund managers earning US$1 million a year (the Singapore government argues managers are paid well because they make good investment choices.

Do they speculate on Fx, officially no for political reasons, but if you are the head of the BoC last year, what would you do? The conservative approach would be to switch from dollars (which were at high risk of losing value) to euros which were safer. Now that euro is strong, the conservative choice would be to switch back to US$. You can call that a windfall profit, but I would call it wise investing.

	01-08-2003 23:06									#43
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Davout: you seem to know about this topic. Do you have any information about the foriegn currency holdings of the BoC?

	02-08-2003 02:19									#44
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quote: Originally posted by Tingkai Davout: you seem to know about this topic. Do you have any information about the foriegn currency holdings of the BoC?

- About this topic I know not enough, but I try
- The holdings as you said are reported in US $ by the BoC (except gold), but the foreign exchange transactions in US$ amount to 98% of the total, the remaining being shared about equally between HKD and JPY (and € 0.1%). That is not enough to build huge stockpiles of € or JPY without serious arbitraging against the US$.

	02-08-2003 07:17									#45
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quote: Originally posted by Tingkai You're still assuming that the rmb is freely traded, which it is not. Because it is not freely traded, the Chinese government does not need to buy US$ to keep the peg.

You can't peg a currency by regulating how it is traded within your own country. The regulations only matter in China. You have to trade currencies to keep a peg. China has a positive trade balance with the US which makes the Yuan stronger than the dollar. In order to keep the peg they have to trade Yuan for dollars. It's possible that they use Yen or something else to buy the dollars, but they certainly have to buy dollars. And if they don't use their own currency it is more expensive for them. By buying dollars with Yen you weaken the dollar but if you compare that with buying dollars with Yuan the first method is more expensive because you have to spend more Yen than you would Yuan to get the same effect.

quote: Originally posted by Tingkai Before you start going about how I am wrong, how about you give a full explanation about your statement above.

I think that you understand what I'm saying, but you just don't see that the BoC does have to buy dollars. If you don't believe that there isn't much else to say.

	02-08-2003 08:03									#46
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Here's a site that says that the BoC buys dollars.

http://www.kwrintl.com/library/2003.../political.html

quote: Officially, China has a managed floating system, but ever since the Asian financial crisis of 1997, the yuan has remained stable against the dollar, and is virtually pegged to the greenback. If, as is the case now, the yuan's value is set at a level that is too low compared to its actual strength, dollar supply exceeds demand. When monetary authorities absorb excess dollars from the market, the nation's foreign exchange reserves increase as a result. If China were to adopt a floating system and authorities did not intervene at all in currency markets, its foreign exchange reserves would not have grown and the yuan would have appreciated instead.

	02-08-2003 10:33									#47
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quote: Originally posted by Kidicious Here's a site that says that the BoC buys dollars. http://www.kwrintl.com/library/2003.../political.html

You seem to be mislead by the sentence :

quote: When monetary authorities absorb excess dollars from the market, the nation's foreign exchange reserves increase as a result.

For me, absorb excess dollars does not mean buy dollars; it means that dollars are arriving at the BoC either through the payment of exports or because foreign investors send dollars in order to invest in China.

This interpretation is in line with the first paragraph of the text you quoted :

quote: Led by rising inflow of foreign direct investment and exports, China's balance of payments surplus has widened further following WTO entry in late 2001. As a result, the county's foreign exchange reserves rose by $74.2 billion (equivalent to 6% of GDP) in 2002 to reach $286.4 billion by the end of the year.

Therefore, we can say safely that the increase in $ reserves did not result from the purchase of $ by the BoC.

BTW, this text also confirm that the $ reserves are made of treasuries bonds.

	02-08-2003 10:44									#48
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quote: Originally posted by DAVOUT For me, absorb excess dollars does not mean buy dollars; it means that dollars are arriving at the BoC either through the payment of exports or because foreign investors send dollars in order to invest in China.

Read the sentence just before that ones that says that there is an excess supply of dollars. The BoC has to absorb these dollars to maintain the peg. The exports and foreign investment cause the excess supply of dollars. That's why the BoC must buy dollars to maintain the peg.

quote: Originally posted by DAVOUT Therefore, we can say safely that the increase in $ reserves did not result from the purchase of $ by the BoC.

The key word is 'led.' Yes the whole reason that the BoC needs to buy dollars is because of their exports to the US and the investments that the US makes in China. These two things lead the BoC to buy dollars.

Context. Context. Context.

	02-08-2003 13:42									#49
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quote: Originally posted by Kidicious Yes the whole reason that the BoC needs to buy dollars is because of their exports to the US and the investments that the US makes in China. These two things lead the BoC to buy dollars. Context. Context. Context.

Sorry, I cant follow you on this one. Contrary to what you state, the whole reason that the BoC needs not to buy dollars is because of their exports to the US (and to almost all other countries since 98% of their foreign trade is in US$) and the investments that the US (and all other countries) makes in China : the dollars are going directly in the BoC which gives Yuans to the owner of the dollars. This is how works a foreign exchange control : all foreign currencies are confiscated by the central bank.

You are misunderstanding the whole process : what the Chinese are buying are US treasury bonds, they need not to buy dollards, they have plenty of them.

	02-08-2003 14:08									#50
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quote: Originally posted by Kidicious Read the sentence just before that ones that says that there is an excess supply of dollars. The BoC has to absorb these dollars to maintain the peg. The exports and foreign investment cause the excess supply of dollars. That's why the BoC must buy dollars to maintain the peg.

You keep saying that, even though we have clearly shown that the BoC does not need to buy US$ to maintain the peg.

If you want to convince us that what you say is true, then explain how you think it works. Start with, people want to sell more US dollars and buy more rmbs. Explain how this results in a situation where the BoC must buy dollars to maintain the peg.

Of course, you won't because you can't show the step, because your theory is incorrect.

I'll try to explain this to you one last time.

First off, there is no real excess supply of US dollars. The person who wrote that article is using poor terminology.

The demand for RMBs comes from people selling US dollars, euros, yens, HK dollars, Cdn dollars, whatever.

So what the author should have written is that the demand to buy RMB exceeds the demand for to sell RMB. That's because China has a trade surplus.

Now, get a pen and paper, then draw a standard supply-demand curve. The vertical axis is the rmb/US$ exchange rate. The horizontal axis is the money supply of RMB.

The RMB is pegged so the supply curve is a horizontal line at 8.28rmb.

Now add a standard demand curve. Let's say there is a change of demand. The demand curve shifts right. People are willing to buy more RMB at the price of 8.28.

The BoC can increase the supply of RMB to meet this demand shift (thereby buying more US dollars), but it doesn't have to.

If the BoC does not increase the supply of RMB then we are just left with an unfulfilled demand gap. That's all. The amount of rmbs it sells, and the amount of US$ it buys does not change. The excess demand for rmb has no effect on the official exchange rate.

So the BoC does not NEED to buy higher volumes of US dollars.

(edit: added "not" to the last line.)

	02-08-2003 14:20									#51
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quote: Originally posted by DAVOUT The holdings as you said are reported in US $ by the BoC (except gold), but the foreign exchange transactions in US$ amount to 98% of the total, the remaining being shared about equally between HKD and JPY (and € 0.1%). That is not enough to build huge stockpiles of € or JPY without serious arbitraging against the US$.

Sure, monthly transaction may well be dominated by US dollars.

I did a google search and results show the exact composition of China's foreign reserves is a state secret.

But several articles claim about 40-50% of China's reserves are in Euros and Yen.

The Chinese government has said in 2002 it has US$120 in treasury bonds with the rest in non-US currencies, according to an AFX story (link below). That would have been about half of the reserves at the time in US bonds.

http://news.tradingcharts.com/futures/6/4/38930646.html

	02-08-2003 17:53									#52
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There are mainly assumptions, some of them questionnable : the arbitraging progressively of a few tens of billions $ against € cannot seriously weaken the $. But I am convince that any move in this area will be extremely cautious.

After all, the economies of the US, Europe and Japan, are by far the biggest; no wonder that a central bank wants to have some of each currency in its reserves.

	02-08-2003 22:30									#53
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quote: Originally posted by DAVOUT Sorry, I cant follow you on this one. Contrary to what you state, the whole reason that the BoC needs not to buy dollars is because of their exports to the US (and to almost all other countries since 98% of their foreign trade is in US$) and the investments that the US (and all other countries) makes in China : the dollars are going directly in the BoC which gives Yuans to the owner of the dollars. This is how works a foreign exchange control : all foreign currencies are confiscated by the central bank.

The exports make their currency stronger compared to the dollar. Do you see that?

quote: Originally posted by DAVOUT You are misunderstanding the whole process : what the Chinese are buying are US treasury bonds, they need not to buy dollards, they have plenty of them.

I didn't say they particularly want the dollars. They are forced to accept them if they want the peg though.

	02-08-2003 22:56									#54
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quote: Originally posted by Tingkai You keep saying that, even though we have clearly shown that the BoC does not need to buy US$ to maintain the peg.

You haven't done that in the lease. Futhermore the Japanese and US govts agree with me. You have the burden of proof and haven't made any progress yet in proving anything or even giving any evidence at all. You argument in completely illogical.

quote: Originally posted by Tingkai If you want to convince us that what you say is true, then explain how you think it works. Start with, people want to sell more US dollars and buy more rmbs. Explain how this results in a situation where the BoC must buy dollars to maintain the peg.

People want to sell dollars because they don't need them. The BoC does need them if they want to maintain the peg. There is simply no possible way the BoC could maintain the peg when there are dollars out there that no one will buy. People need the rmb for the same reason they need any other currency, to make international transactions.

When the dollar weakens the BoC must buy them up to maintain the peg. The dollar weakens in part because of the US imports from China and elsewhere.

quote: Originally posted by Tingkai First off, there is no real excess supply of US dollars. The person who wrote that article is using poor terminology.

No, because the BoC (and other central banks) buys dollars until the dollar/yuan exchange rate stablizes.

quote: Originally posted by Tingkai The demand for RMBs comes from people selling US dollars, euros, yens, HK dollars, Cdn dollars, whatever.

Partly yes. That is exactly why the BoC must buy dollars. There is continually more dollars than people need or want. The peg can not be maintain under such a situation.

quote: Originally posted by Tingkai So what the author should have written is that the demand to buy RMB exceeds the demand for to sell RMB. That's because China has a trade surplus.

Again. That is exactly why the BoC must continually buy dollars.

quote: Originally posted by Tingkai Now, get a pen and paper, then draw a standard supply-demand curve. The vertical axis is the rmb/US$ exchange rate. The horizontal axis is the money supply of RMB. The RMB is pegged so the supply curve is a horizontal line at 8.28rmb. Now add a standard demand curve. Let's say there is a change of demand. The demand curve shifts right. People are willing to buy more RMB at the price of 8.28. The BoC can increase the supply of RMB to meet this demand shift (thereby buying more US dollars), but it doesn't have to. If the BoC does not increase the supply of RMB then we are just left with an unfulfilled demand gap. That's all. The amount of rmbs it sells, and the amount of US$ it buys does not change. The excess demand for rmb has no effect on the official exchange rate. So the BoC does not NEED to buy higher volumes of US dollars. (edit: added "not" to the last line.)

Oh you are very confused. First off I think it's clearer to look at it from the supply and demand for dollars since it is the rmd that is pegged to the dollar.

The US has an negative and increasing trade ballance. That coupled with the fact that there is less investment demand in the US as there used to be means that there is an increase in supply of the dollar. This means that the dollar/rbm exchange rate falls. The BoC has to buy up dollars to keep the peg. That, if you like the graphs, shifts demand to maintain the pegged exchange rate.

	03-08-2003 02:47									#55
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Kid,
I am desparate. Since the beginning you claim that the BoC is buying dollars and you are unable to tell with what they pay those dollars.

The peg is nothing more than an unilateral decision that the dollar is worth 8.28 Yuans; this decision is completed by a strict foreign exchange control.
As 98% of the goods sold abroad a billed in US$, the Chinese companies receive paiement of their bills in US $. This dollars are compulsorily deposited to the BoC against Yuans at the rate of 8.28.
In this way, the BoC has dollars that have not been bought on the market, and the peg which is nothing more than an arbitrary decision has not to be maintain. China can decide whenever it wants to change the rate to 9.2 or 7.8, but there is no natural law regarding the peg, as well as there is no market for the Yuan.

Please let me know if you have a definition of the peg different from mine.

	03-08-2003 04:35									#56
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quote: Originally posted by DAVOUT Kid, I am desparate. Since the beginning you claim that the BoC is buying dollars and you are unable to tell with what they pay those dollars. The peg is nothing more than an unilateral decision that the dollar is worth 8.28 Yuans; this decision is completed by a strict foreign exchange control. As 98% of the goods sold abroad a billed in US$, the Chinese companies receive paiement of their bills in US $. This dollars are compulsorily deposited to the BoC against Yuans at the rate of 8.28. In this way, the BoC has dollars that have not been bought on the market, and the peg which is nothing more than an arbitrary decision has not to be maintain. China can decide whenever it wants to change the rate to 9.2 or 7.8, but there is no natural law regarding the peg, as well as there is no market for the Yuan. Please let me know if you have a definition of the peg different from mine.

Yes I do. The peg is not just a decision that the BoC makes. They have to maintain the fixed exchange rate by trading on the forex. Since the yuan gets stronger than the dollar they have to buy dollars on the forex. As I have also said, the best currency to buy those dollars with is their own. If they use other currency it will cost them more.

	03-08-2003 05:03									#57
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Let me type right out of my textbook. This is from the chapter on international finance.

The market demand for a currency originates from three things.

-foreign demand for that countries exports
-foreign demand for investment in that country
-speculation

The supply of a currency originates from three things.

-that countries demand for imports
-that countries foreign investments
-speculation

Now compare the yuan and the dollar with these determinants of their exchange rates. See that the yuan would naturally get stronger than the dollar. But it doesn't because the BoC buys dollars to beg their currency to the dollar.

There. I've spelled it out. That's all.

	03-08-2003 05:15									#58
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quote: Originally posted by Kidicious Yes I do. The peg is not just a decision that the BoC makes. They have to maintain the fixed exchange rate by trading on the forex. Since the yuan gets stronger than the dollar they have to buy dollars on the forex. As I have also said, the best currency to buy those dollars with is their own. If they use other currency it will cost them more.

You repeat endlessly the same affirmation without reference or demonstration. There is no legal use of the Yuan outside China, it can not be used on the Forex or on any other market. Your theory is wrong from A to Z because it is not compatible with the fix rate, and would it be that the purchase of $ on the forex against a smaller number of Yuans than before (since the Yuan would be stronger) could hardly reduce the strengh of the Yuan.

	03-08-2003 05:26									#59
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quote: Originally posted by Kidicious Let me type right out of my textbook. This is from the chapter on international finance. The market demand for a currency originates from three things. -foreign demand for that countries exports -foreign demand for investment in that country -speculation The supply of a currency originates from three things. -that countries demand for imports -that countries foreign investments -speculation Now compare the yuan and the dollar with these determinants of their exchange rates. See that the yuan would naturally get stronger than the dollar. But it doesn't because the BoC buys dollars to beg their currency to the dollar. There. I've spelled it out. That's all.

Nice theory.

But it does not match the reality by one detail : the Chineses decided that there will be NO MARKET for the Yuan; internal use only. And they will adjust the fix rate when they will find it convenient for them.

	03-08-2003 06:31									#60
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quote: Originally posted by DAVOUT Nice theory. But it does not match the reality by one detail : the Chineses decided that there will be NO MARKET for the Yuan; internal use only. And they will adjust the fix rate when they will find it convenient for them.

They have no power to do that.