Wednesday, August 10, 2005

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The Chinese step closer to currency transparency

That's the message contained in this Financial Times report:

China stepped up the pace of its effort to liberalise its currency regime, allowing more financial institutions and companies to trade foreign currencies in the spot market and introducing renminbi forward contracts and swaps into the onshore interbank market.

The announcement follows the landmark move by the central bank three weeks ago to scrap the renminbi’s decade-long peg to the US dollar, and is in line with Beijing’s pledge to gradually introduce broader currency reform.

It also coincides with a speech by Zhou Xiaochuan, the central bank governor, who was reported by several news agencies to have revealed more details of the make-up of the currency basket to which the renminbi is referenced after it was de-pegged from the US dollar.

The US dollar, the Japanese yen, the euro, and the South Korean won are the dominant currencies in the basket, news agencies quoted Mr Zhou as saying in Shanghai. The basket also includes Singapore dollar, sterling pound, the Malaysian ringgit, the Russian rouble, the Australian dollar, the Thai baht and the Canadian dollar, the reports said.

Click here to read Zhou Xiaochuan's speech.

UPDATE: This April 2005 World Economy paper by Michael Funke and Jörg Rahn suggests that even if the renminbi were allowed to float, its appreciation would be far less than many believe.

posted by Dan on 08.10.05 at 02:05 PM


he concluding paragraph of Zhou's speech:

"In sum, the reform of RMB exchange rate regime to allow RMB exchange rate float with reference to a basket of currencies is in line with the needs of diversifying foreign economic and trade relations as well as the development of the international economic and financial system. Referring to a basket of currencies is not equal to pegging to such a basket. Pegging means mechanically adjusting the exchange rate of RMB against the US dollar according to the exchange rate movements of the currencies in the basket in an attempt to keep the nominal effective exchange rate unchanged. Quite differently, what we are having now is a managed floating exchange rate regime based on market demand and supply with reference to a basket of currencies. In comparison with an exchange rate regime of pegging to the US dollar solely, it can better reflect the competitiveness of RMB against major currencies, better absorb the impact generated by an unstable US dollar and moderate the fluctuations of RMB exchange rates at the multilateral level, safeguard the overall stability of China's foreign economic and trade environment and consequently promote the basic equilibrium of balance of payments as well as the sustained, coordinated and healthy growth of the Chinese economy."

Apart from the line about referring to the basket allowing China to "...better absorb the impact generated by an unstable US dollar" -- a clear indication that China thinks substantial weakening of the dollar over a short period of time is a real possibility -- this language could mean anything.

posted by: Zathras on 08.10.05 at 02:05 PM [permalink]

China may well want to move some of their maybe $500 billion into other currencies, or even a basket of currencies.

But if the move means a 10% depreciation of the USD, that's an effective cost of $50 billion -- for nothing, or almost nothing.

Prolly NOT buying more dollars, as the dollar strengthens, is the best China can do; buying Euros and yen and won, instead. But whatever they buy, in some sense they're getting paper for selling real products, like TVs & monitors.

Why not have more loans to local Chinese businesses who can increase production for the local market -- and hire more Chinese laborers who can then buy more of the local stuff. (They're already trying this ...)

posted by: Tom Grey - Liberty Dad on 08.10.05 at 02:05 PM [permalink]

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