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Tingkai
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To find the Northwest Passage
Aug 2001
time: 13:29
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quote:
Originally posted by Kidicious
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. |
There is absolutely no trading of the RMB. It is a controlled currency.
The BoC has a monopoly, unlike other currencies where the exchange rate is determined on the open market.
The only way you can buy rmb, or sell rmb is to go through the BoC or a Mainland commercial banks that acts as a middleman for the BoC. Any large exchange of RMB must have paperwork to explain why the exchange is being made. Commercial banks follow the rules because they don't want to break the law.
The open market for the RMB would not work. Let's say you're in the US and you buy 100,000 rmb. What are you going to do with it. The only place you can spend it is in Mainland China. You can't wire it to a bank there because that's illegal. You could smuggle it in, but that's illegal in the US and China. That's why everyone goes through the BoC.
Kidicious, everything you have stated about the RMB is wrong.
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Tingkai
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To find the Northwest Passage
Aug 2001
time: 13:29
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Very good. You know how to cut and paste. Now all you have to do is understand what you just posted.
What do you think Oxford means when it says.
quote:
A fixed exchange rate cannot be established by mere policy statements by the government or central bank issuing the currency. Effective policies to maintain a fixed rate and a credible commitment to stick to them are both needed.
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Tell us how the following applies to China, where the willingness to hold the RMB is high.
quote:
Maintenance of a fixed exchange rate requires that a country hold sufficient foreigh exchange reserves, which are used for intervention in the foreign exchange market to absorb small variations in willingness to hold its currency,
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Explain how the Hong Kong system uses monetary and fiscal policies to maintain the HK dollar peg.
quote:
and that monetary and fiscal policies are used sufficiently vigorously to keep these variations small.
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If you can't expain these points then all you have done is cut and paste, and anyone can do that.
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DanS
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Kickball Capital of the World
Jan 1970
time: 00:29
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Tinkai: All of what you say seems true. However, am I right in saying that the perceived value of the Yuan does have an impact on money flows? If it is perceived that the Yuan will revalue higher, then hot money attempts to flow into China.
This speculative hot money adds directly to China's money supply, since basically the gov't is printing a set number of Yuan when they "buy" a dollar. China's money supply grows. China's reserves grow. The Yuan appears to be further undervalued. The trade surplus grows. Then the cycle begins again.
Isn't what China lost or will lose in this equation is the ability to set money supply, if they don't revalue periodically? A massive amount of money flowing into or out of the system will--sooner or later--cause either an overheated economy or an illiquid economy. If China really tamps down hard on fx transactions, that will cause chaos in the business community. And that's when companies may go to alternatives to the BoC to set a truer market price.
Last edited by DanS on 03-08-2003 at 22:43
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DAVOUT
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AUERSTADT
Jun 2002
time: 05:29
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quote:
Originally posted by DanS
Tinkai: All of what you say seems true. However, am I right in saying that the perceived value of the Yuan does have an impact on money flows? If it is perceived that the Yuan will revalue higher, then hot money attempts to flow into China.
This speculative hot money adds directly to China's money supply, since basically the gov't is printing a set number of Yuan when they "buy" a dollar. China's money supply grows. China's reserves grow. The Yuan appears to be further undervalued. The trade surplus grows. Then the cycle begins again.
Isn't what China lost or will lose in this equation is the ability to set money supply, if they don't revalue periodically? A massive amount of money flowing into or out of the system will--sooner or later--cause either an overheated economy or an illiquid economy. If China really tamps down hard on fx transactions, that will cause chaos in the business community. And that's when companies may go to alternatives to the BoC to set a truer market price. |
DanS,
This would be a problem if the Chineses were not able to prevent the speculative hot money to enter. They control the outflow, but also the inflow; it is not easy to invest in China due to the regulations of the cash movements. However, the problem you suggest could also result from the authorized exports and autorized foreign investments in China, and it is one of the reasons why people advocate for a softening of the current system.
As a matter of fact, they have protected themselves from any possible speculation against their money.
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DAVOUT
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AUERSTADT
Jun 2002
time: 05:29
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quote:
Transcript of an Economic Forum
Foreign Direct Investment in China: What Do We Need To Know?
International Monetary Fund
IMF Auditorium
Thursday, May 2, 2002
Washington, D.C.
...........
by Markus Rodlauer, Division Chief, Asia and Pacific Department, IMF
I'll talk briefly about the outlook for convertibility of the renminbi and the further liberalization of the capital account.
As you all know, China has started in the late 1970s, early 1980s by opening up its foreign trade regime and foreign direct investment regime, and recently has then also opened a bit the portfolio inflows. Two recent milestones in external liberalization were the unification of the exchange rate system in 1994 and then the achievement of current account convertibility in 1996. That means today exporters or importers basically can do their transactions and get foreign exchange if they can prove they have an underlying current transaction.
However, there still are extensive capital controls. China basically maintains these very tight controls on the capital account for several policy reasons. First, it allows scope for an independent monetary policy and at the same time keeping a stable exchange rate. Second, it limits the vulnerability to capital flow reversals. And, third, it helps to protect certain domestic industries.
So in the current regime, as I said, FDI is fairly open, so it's a very encouraging attitude to foreign investment. But one should still remember it's very tightly regulated on an individual basis. For each deal, for each foreign investment that comes in, there are very precise conditions specified at the outset on employment, on the way of financing and how much money has to be brought in and so forth.
Then there are the portfolio and other capital flows like loans. Those, again, are very tightly, strictly controlled, and the way the control system works is that it's segregated between domestic enterprises, domestic agents, and foreign enterprises, foreign agents.
So, for example, in the equity markets, there are two divided markets. One is for domestic residents and domestic renminbi. You can buy and sell stocks if you're a Chinese citizen and have renminbi. This is one side of the market. The other side of the market is foreigners with foreign exchange who can buy another type of stocks. This has recently been opened up a bit. Some domestic residents now can buy foreign stocks, B market stocks, but still this principle pretty much applies to all the capital account transactions, loans and so forth.
So while these capital controls, as I said, are fairly comprehensive from a regulatory perspective, they have proven to be not watertight. Particularly during the Asian crisis, we have seen a very large amount of disguised outflows, and you'll recall the numbers in the first table where we had about 50 billion of outflows, which really there isn't a very good explanation for. These large outflows during the Asian crisis then prompted some tightening of these controls by the authorities, and they were somewhat effective but, still, we have fairly large unexplained outflows.
Now, where do we go from here? Should and will China further open its capital account? Clearly, there is a strong case for China to eventually open up the capital account with the ultimate goal of full convertibility. I don't think it's necessary to restate the quite well known overall benefits of convertibility. In one way, it's unavoidable. Every advanced economy today has an open capital account, and, specifically what's in there for China, clearly it would provide access to cheaper financing, new technologies, and for individual Chinese agents, access to much more diversified and risk-balanced portfolios; and in the end it would result in higher investment and higher growth. And also given the difficulties of actually keeping capital controls in place effectively, it is in the end, in the long run, inevitable, particularly since, as Nick has explained, WTO now has created concrete commitments of the authorities to integrate the financial sector much more.
Now, one could conceivably think that these financial sectors could become integrated but still keeping capital controls. But the more you integrate in the real side and have businesses coming in and out, the more pressure there will be to actually allow also a freer flow of capital. So, in the end, I think it will become inevitable, and it is, I think, a very appropriate long-term goal. And it is, therefore, not surprising, and appropriate, that China itself has stated explicitly and set itself these goals, this long-term goal.
While the benefits are very well known of capital account liberalization, so are, of course, the risks. Capital account liberalization affects financial stability through two main interrelated channels. On the one hand, there is the risk of overheating from very large capital inflows, and, on the second part, on a more micro level, opening up the capital account to free flows of capital across borders really allows excessive risk taking by individual enterprises, and especially banks. And so that from the micro level, it fosters, because of the well-known problem of asymmetric information, the risks that banks just go overboard and assume excessive risk and excessive liabilities.
These conditions raise the risk of sudden reversals of these capital flows, which could then lead to external payments crises and, therefore, large output losses and welfare losses.
A third risk which we have learned in recent years also is that initial shocks in one country to one economy, to one financial system, can be transmitted and spread much more easily to other countries through the so-called contagion effect if you have an open capital account.
Now, the Chinese authorities, of course, are very well aware of this risk and have, therefore, chosen a very deliberate and a very gradual path of capital account liberalization. And the authorities—when you ask them why is it that you keep your capital account still under control, what they mostly mention very specifically is that until their enterprises and their banks are reformed and have tight budget constraints and behave in a commercial manner, they are afraid that you would just have excessive borrowing, huge excessive borrowing, like we have had in many other transition economies, where increased latitude for enterprises and banks to make economic decisions without having the commercial orientation, the tight budget constraints, leads to huge excessive borrowing and, therefore, instability. And the second reason they mention is that their still fairly narrow capital markets could lead to very large volatility if you have uncontrolled flows across the border.
So how then to go about capital account liberalization? Well, two broad lessons from the country experience in recent years we have drawn is that those countries that have avoided crises are those that have strong macroeconomic policies and those that have a strong financial system. For China, on the macro side, I think they rank very well on one of three items, which is the external position. It's very, very strong as we know. But there are two other issues that are still to be resolved. One is you need to have sustainable public finances, which in China is still something to work on given the problems in the enterprises and in the banks. And then also the choice of the exchange rate regime, the more you open up your capital account, the more it will be necessary to have a flexible exchange rate system. And also given the very large structural changes underway in the economy, our advice has been in recent years increasingly that at some point China will have to move from its currently fixed exchange rate or very stable exchange rate system to greater flexibility gradually.
So on the macro side, there is still some work to do on the public finances and on the exchange rate and monetary policy side. In the banking and SOE side,—certainly it's key to rehabilitate the state-owned enterprises and the state-owned banks before you can think of substantially further opening up the capital account. You need a strong prudential system to contain excessive risk taking, and you need good accounting, auditing, disclosure standards to allow information to be transmitted to the markets, as well supervisors.
So, there is a large work program ahead to be able to reach this ultimate goal of convertibility, but I'd like to emphasize another point here, too. Our experience has been that opening up and liberalization is a very complex and interrelated enterprise. And while full liberalization has to come, of course, at the later stages, one cannot really wait with individual opening up until everything is perfect. Market reforms, as I said, are inter-dependent. For example, markets will not develop at all unless you open up a bit. So one has to do many of these things in tandem and gradually at the same time, which necessarily creates uncertainties and is certainly a volatile enterprise. But one has to start somewhere, and then the key is, of course, to monitor very closely, very carefully, and to be very flexible along the way and implement carefully.
China I think has got it quite right from the beginning in terms of the sequencing of what flows to open first and what last. It started with FDI. It then went over to portfolio equity flows in the stock market, and other debt-creating flows, particularly in the short end, should come last.
So, in conclusion, maybe three points. One is convertibility certainly is a valid long-term goal, and the authorities have adopted it. However, it needs to be very carefully phased in and supported by reforms and appropriate macro policies. It is, however, an inevitable process that will come, and certainly WTO accession has provided further impetus both for the actual integration of China's economy to the rest of the world, for the further opening of the capital account, and for all the necessary supporting reforms.
Thank you.
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If convertibility of the Renminbi is certainly a valid longterm goal, that implies that the Renminbi is not convertible right now.
Until I am told the contrary, of course ...
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Kidicious
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Diety of Kidiverse
Mar 2003
time: 21:29
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Read this. Understand it. No more insults next time please.
Forex Market: China Yuan Weakened Slightly
quote:
Forex Market: China Yuan Weakened Slightly
China's yuan eased two notches to 8.2774 against the US dollar yesterday as importers stepped up buying of the hard currency, dealers said.
The yuan remained stifled in a tight range of 8.2772 to 8.2775. Turnover, a thin US$380 million on Tuesday, was not immediately available.
"There was some dollar buying from importers late in today's session which drove the yuan slightly lower," said a Chinese bank dealer, adding that most deals were seen around 8.2772 and 8.2773.
Dealers said the yuan was likely to hover between 8.2770 and 8.2775 in the short run, near the strong end of a government-set trading box of 8.2760 to 8.2800, buoyed by ample dollar supply after a persistent trade surplus over the past few years.
Central bank governor Zhou Xiaochuan has said the government would keep the yuan's exchange rate stable, although officials from the United States, Japan and South Korea have said the currency is being kept artificially low.
Yesterday, the yuan weakened against the Japanese currency to 6.9021 per 100 yen from 6.8933, and softened to 8.8997 against the euro from 8.8181.
(China Daily April 10, 2003)
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DAVOUT
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AUERSTADT
Jun 2002
time: 05:29
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Range of the transactions:
8,2772 8,2775 -0,0003 -0,003624414%
The spread is 4/100000, the upper limit being exactly in the middle of the official box.
Range of most of the transactions:
8,2772 8,2773 -0,0001 -0,001208138%
The spread is 1/100000.
Anticipated range :
8,277 8,2775 -0,0005 -0,006040836%
The anticipated spread is 6/100000
Official range :
8,276 8,28 -0,0040 -0,048332528%
The official spread is 5/10000
In the real world economy, all those range are to small to be of any use; the accuracy of economic anticipation will not be changed if we take the middle of the box or the upper or lower limit.
In the real world finance, I have not yet met a trader interested in winning 6$ on a transaction amounting to 100000$.
This only confirm that the BoC keeps a iron hand on the rate of the RMB.
Thank you for the data.
NB : No possible insult in the above.
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03-08-2003 06:46
You obviously have no idea how pegged exchange rates work. 
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