Showing posts with label Yuan. Show all posts
Showing posts with label Yuan. Show all posts

Saturday 6 November 2010

The age of the dollar is drawing to a close

The age of the dollar is drawing to a close
Currency competition is the only way to fix the world economy, says Jeremy Warner.

By Jeremy Warner
Published: 7:04AM GMT 05 Nov 2010


Dollar hegemony was itself a major cause of both the imbalances and the crisis Photo: BLOOMBERG

Right from the start of the financial crisis, it was apparent that one of its biggest long-term casualties would be the mighty dollar, and with it, very possibly, American economic hegemony. The process would take time – possibly a decade or more – but the starting gun had been fired.

At next week's meeting in Seoul of the G20's leaders, there will be no last rites – this hopelessly unwieldy exercise in global government wouldn't recognise a corpse if stood before it in a coffin – but it seems clear that this tragedy is already approaching its denouement.

To understand why, you have to go back to the origins of the credit crunch, which lay in the giant trade and capital imbalances that have long ruled the world economy. Over the past 20 years, the globe has become divided in highly dangerous ways into surplus and deficit nations: those that produced a surplus of goods and savings, and those that borrowed the savings to buy the goods.

It's a strange, Alice in Wonderland world that sees one of the planet's richest economies borrowing from one of the poorest to pay for goods way beyond the reach of the people actually producing them. But that process, in effect, came to define the relationship between America and China. The resulting credit-fuelled glut in productive capacity was almost bound to end in a corrective global recession, even without the unsustainable real-estate bubble that the excess of savings also produced. And sure enough, that's exactly what happened.

When politicians see a problem, especially one on this scale, they feel obliged to regulate it. But so far, they've been unable to make headway. This is mainly because the surplus nations are jealous defenders of their essentially mercantilist economic models. Exporting to the deficit nations has served them well, and they are reluctant to change.

Ironically, one effect of the policies adopted to fight the downturn has been to reinforce the imbalances. Fiscal and monetary stimulus in the US is sucking in imports at near-record levels. The fresh dose of quantitative easing announced this week by the Federal Reserve will only turn up the heat further.

What can be done? China won't accept the currency appreciation that might, in time, reduce the imbalances, for that would undermine the competitiveness of its export industries. In any case, it probably wouldn't do the trick: surplus nations have a habit of maintaining competitiveness even in the face of an appreciating currency.
Unable to tackle the problem through currency reform, the US has turned instead to the idea of measures to limit the imbalances directly, through monitoring nations' current accounts. This has already gained some traction with the G20, which has agreed to assess the proposal ahead of the meeting in Seoul. As a way of defusing hot-headed calls in the US for the imposition of import tariffs, the idea is very much to be welcomed, as a trade war would be a disaster for all concerned. China, for one, has embraced the concept with evident relief.

Unfortunately, the limits as proposed would be highly unlikely to solve the underlying problem. Similar rules have failed hopelessly to maintain fiscal discipline in the eurozone. What chance for a global equivalent on trade? With or without sanctions, the limits would be manipulated to death. And even if they weren't, the proposed 4 per cent cap on surpluses and deficits would only marginally affect the worst offenders: for a big economy, a trade gap of 4 per cent of GDP is still a massive number, easily capable of creating unsafe flows of surplus savings.


No, globally imposed regulation, even if it could rise above lowest-common-denominator impotence, is unlikely to solve the problem, although it might possibly stop it getting significantly worse. But what would certainly fix things would be the dollar's demise as the global reserve currency of choice.

As we now know, dollar hegemony was itself a major cause of both the imbalances and the crisis, for it allowed more or less unbounded borrowing by the US from the rest of the world, at very favourable rates. As long as the US remained far and away the world's dominant economy, a global system based on the dollar still made some sense. But America has squandered this advantage on credit-fuelled spending; with the developing world expected to represent more than half of the global economy within five years, dollar hegemony no longer makes any sense.

The rest of the world is now openly questioning the merits of a global currency whose value is governed by America's perceived domestic needs, while the growth that once underpinned confidence in its ability to repay its debts has never looked more fragile.

Already, there are calls for alternatives. Unwilling to wait for one, the world's central banks are beginning to diversify their currency reserves. This, in turn, will eventually exert its own form of market discipline on the US, whose ability to soak the rest of the world by issuing ever more greenbacks will be correspondingly harmed.

These are seismic changes, of a type not seen for a generation or more. I hate to end with a cliché, but we do indeed live in interesting times.


http://www.telegraph.co.uk/finance/comment/jeremy-warner/8111918/The-age-of-the-dollar-is-drawing-to-a-close.html

Wednesday 20 October 2010

China's rate hike complicates bid to control yuan

20 OCT, 2010

China's rate hike complicates bid to control yuan

BEIJING: China's first rate hike since 2007 has laid bare official fears over surging prices but could also complicate Beijing's controversial efforts to keep a lid on its currency, analysts said.

The move announced by the central bank late Tuesday caught global markets by surprise and came before a meeting this week of G20 finance ministers in South Korea , where currency frictions are expected to loom large.

Rising inflation and soaring property prices forced the government to hike one-year lending and deposit rates by 25 basis points each, after a range of previous measures introduced this year proved inadequate, analysts said.

They said the move may also indicate that third-quarter data China is to unveil on Thursday will show the world's second-largest economy grew faster than authorities had expected, easing any qualms about raising rates.

The "decision suggests the acceleration in growth and official worries about property and inflation are more serious than anticipated", said Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland .

The rate hike depressed stock markets across Asia Wednesday on worries that any Chinese slowdown could hit fragile global growth. Tokyo's Nikkei index closed 1.65 percent down and the Hang Seng in Hong Kong slipped 0.87 percent.

China's inflation has accelerated in recent months, rising at its fastest pace in nearly two years in August when consumer prices went up 3.5 percent year-on-year, as food prices surged after extreme weather hit crop yields.

At the same time, property prices in major cities have remained stubbornly high and bank lending has continued to grow, defying official moves to dampen both.

"The asymmetric hike suggest that the authorities wished to make deposits a more attractive investment proposition than property to discourage property speculation," Nomura analysts Tomo Kinoshita and Chi Sun said in a note.

Beijing has delayed raising interest rates until now partly due to concerns it could attract speculative money chasing a relatively higher yield, making it more difficult to keep the Chinese yuan stable.

The central bank has to buy the dollars flowing into China's export machine to prevent the yuan from rising too quickly. The dollars then pile up on the country's world-beating stockpile of foreign currency reserves.

Beijing pledged in June to let the yuan trade more freely and the currency has since strengthened slightly. But Beijing maintains a tight grip on the yuan despite US and European pressure to let it appreciate.

The yuan was trading Wednesday at 6.6546 to the dollar, weaker than Tuesday's close of 6.6447.

Critics of China's yuan policy say it undervalues the currency by as much as 40 percent to give Chinese exports an unfair edge on world markets.

Higher interest rates could lead to an "intractable monetary policy dilemma" for Beijing by encouraging more foreign capital inflows into China, said Nicholas Consonery, an analyst at Washington-based Eurasia Group.

http://economictimes.indiatimes.com/articleshow/6779921.cms

Saturday 9 October 2010

George Soros warns China of global 'currency war'

George Soros has warned that a global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy.

By Rupert Neate
Published: 3:01PM BST 09 Oct 2010

Hedge fund manager George Soros, chairman of Soros Fund Management LLC

Mr Soros, the hedge fund manager best known as the man who broke the Bank of England” after he made a billion betting against the value of Sterling on Black Wednesday in 1992, said the China had created a “lopsided currency” system.

He criticised China for deliberately keeping the yuan - its currency -low in order to keep exports cheap, which is hurting US competitors.


Related Articles
George Soros warns jump in stock markets since March is a 'bear-market rally'
Banks' $4 trillion debts are 'Achilles? heel of the economic recovery', warns IMF
New York Times chief pledges to repay Carlos Slim loan early
Tim Yeo: More radical steps are needed to tackle climate change
Spectris to shed 600 jobs as profits tumble
How to save the economy and make a fortune ? set up a bank


Mr Soros told BBC Radio 4’s Today programme that China had a “huge advantage” over international competitors because it can control the value of its currency.

He said China could also influence the value of other world currencies because they have a “chronic trade surplus”, which means the Chinese have a lot of foreign currencies. “They control not only their own currency but actually the entire global currency system,” he said.

Writing in the Financial Times, Mr Soros added: “Whether it realizes it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it.”

China’s central bank governor Zhou Xiaochuan defended the world’s second largest economy, however.

“We’ve already started to have exchange rates reform for quite long time...[but] it is gradual... it is good for a large economy otherwise it may be dangerous,” he told the BBC on the sidelines of this weekend’s International Monetary Fund meeting in Washington.

http://www.telegraph.co.uk/finance/8052729/George-Soros-warns-China-of-global-currency-war.html

Sunday 8 August 2010

How China's Dollar Peg Works





http://www.marketoracle.co.uk/Article8320.html

Bullbear Stock Investing Notes

Friday 25 June 2010

G20 nations see different paths for securing recovery

REUTERS, Jun 25, 2010, 08.47am IST


TORONTO/WASHINGTON: World leaders aimed for a common target on Thursday of securing the economic recovery, but disagreed over how best to reach it.

With two days to go before the Group of 20 summit convenes in Toronto, officials tried to downplay differences between the United States and Europe over how quickly to shift from crisis-fighting mode to budgetary belt-tightening.

"That's the delicate balance that we need to try to strike this weekend," Canadian finance minister Jim Flaherty said.

His US counterpart, Timothy Geithner, said each country needed to decide what policy mix made sense to ensure both growth and fiscal responsibility.

"Our job is to make sure we're all sitting there together, focused on this challenge of growth and confidence because growth and confidence are paramount," he said in an interview with BBC World News America.

The G20 club of rich and emerging economies joined forces at the height of the global financial panic and poured an estimated $5 trillion into stimulus spending, emergency loans and bank guarantees, helping to ward off a global depression. 

The group still has a long and difficult to-do list, including forging consensus on new rules about how much capital that banks must hold, and making sure national financial regulatory reforms do not clash on a global scale.

The cost of fighting the financial crisis and recession left gaping holes in government finances, and Greece's debt troubles have focused Europe's attention on the need to shrink budget deficits before investors lose patience. 

European Commission president Jose Manuel Barroso said Europe could no longer afford to borrow and spend, and must repair budgets in order to rebuild confidence for growth. 

"It will not be a change overnight but
there is no more room for deficit spending," Barroso told a news conference in Toronto.

The United States wants to make sure European countries - Germany, in particular - do not remove government supports too quickly because that could derail the recovery.

US stocks fell on Thursday on concerns over the durability of the economic rebound.

President Barack Obama, pushing Washington's pro-growth, line, said "surplus countries" - often code for Germany and China - must find ways to stimulate growth. But he also acknowledged that countries including the United States with medium- and long-term deficit problems would have to address them.

"Not every country is going to respond exactly the same way, but all of us are going to have responsibilities to rebalance in ways that allow for long-term, sustained economic growth," Obama said in Washington during an appearance with Russian President Dmitry Medvedev.

White House economic adviser Lawrence Summers, in an interview with Reuters, also stressed that growth would be key, but said it was not simply a matter of choosing between austerity and expansion.

"There obviously is an importance in having a growth strategy, but I think it's too simple to think of growth strategies only as running budget deficits or printing money," he said. 


In Europe, senior officials were in no mood to back down on their plans to cut spending.

Saying she expected "controversial discussions" in Toronto over Europe's budget priorities, German Chancellor Angela Merkel insisted Berlin would forge ahead with its biggest program of fiscal cutbacks since World War II.

European Central Bank president Jean-Claude Trichet dismissed the idea budget cuts could torpedo the fragile economic recovery that is taking hold.

"The idea that austerity measures could trigger stagnation is incorrect," Trichet told Italian newspaper La Repubblica, describing the German budget plans as "good" and repeating calls for more fiscal discipline in the 16-nation euro zone. 

Merkel, who aims to save 80 billion euros in the next four years, told ARD television that sustained growth could only be guaranteed through getting a grip on deficits and debt. 

"I and the EU will argue this position. There are others who are not yet so convinced of this exit strategy," she said.

The G20, which includes the world's biggest economies and two-thirds of its population, holds its summit in Toronto on Saturday and Sunday. It will be preceded by a meeting on Friday and Saturday of the G8, composed of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.

Downtown Toronto's downtown banking district has seen business drop off as heavy security is mounted. Canadian police said on Thursday they had arrested the driver of a car near the meeting site who was carrying a chainsaw, crossbow and fuel containers.

BANKING REFORM

Economic policy has not been the only issue dividing the G20, which has also seen its unity tested by reforms to the banking sector.

European proposals for global taxes on banks and financial transactions have run into opposition from countries like Canada that say their banks are in good health. 

European countries are concerned that planned new rules requiring banks to set aside more capital may crimp lending.

Obama, meanwhile, hopes to sign off on rules to regulate finance within weeks as lawmakers raced to meet a Thursday deadline they had set themselves to agree on their own financial overhaul package.

Obama signalled on Thursday that China's move this week to relax the peg of its currency, the yuan, to the dollar may not be enough to shield Beijing from accusations that it is using the currency to gain an unfair trade advantage. 

"The initial signs were positive. But it is too early to tell whether the appreciation, that will track the market, is sufficient to allow for the rebalancing that we think is appropriate," Obama said.

The yuan has risen by about 0.4 percent against the dollar since Beijing's policy change - a significant step relative to its earlier freeze, but far less than the 25 to 40 per cent increase that some analysts say it needs to make to achieve fair value.

Sunday 20 June 2010

China signals plans for stronger yuan

China signals plans for stronger yuan
June 20, 2010 - 9:11AM

China said it will allow a more flexible yuan, signaling an end to the currency's two-year-old peg to the US dollar a week before a Group of 20 summit.

The decision was made after the world's third-largest economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for ``large-scale appreciation,'' and kept the yuan's 0.5 per cent daily trading band unchanged.

``The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,'' the People's Bank of China said. ``It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.''

The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner's policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.

``This is another small victory for Tim Geithner,'' Goldman Sachs's Chief Global Economist Jim O'Neill said in an interview with Bloomberg Television in St. Petersburg, Russia.

The Australian dollar is buying about 5.9 yuan. A stronger yuan may slow the Chinese economy as its exports become less competitive in international markets. On the other hand, China is likely to import more, and its currency will make overseas investments by Chinese companies - such as in Australia's resources and property - more attractive.

`China bashing'

``It makes it a lot more difficult for Washington and Congress to do China bashing,'' O'Neill said. ``The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.''

Geithner, in a statement, praised China's decision and added that ``vigorous implementation would make a positive contribution to strong and balanced global growth.'' The Obama administration received advance notice of the announcement, US officials said.

China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.


``It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,'' said Prasad, a former head of the China division at the International Monetary Fund. The move ``also serves to acknowledge that they have an important responsibility to the international community.''

Helping exporters

Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.

The currency appreciated 21 per cent in the three years after a peg to the US dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China's currency, the renminbi.

``This move is a vote of confidence in the global recovery and a reaffirmation of Beijing's longstanding commitment to a flexible currency regime,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. ``This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.''

Import costs

Companies focused on the Chinese market, including Beijing-based computer maker Lenovo and Shanghai-based China Eastern Airlines, said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would ``face bankruptcy'' with profit margins as low as 3 per cent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March.

A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week.

China's inflation rate jumped to a 19-month high of 3.1 per cent in May, higher than the government's full-year target of 3 per cent. Central-bank dollar buying has left the nation with $US2.4 trillion in currency reserves, the world's largest holding.

`Crisis mode'

``China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,'' Li Daokui, an adviser on the People's Bank of China's policy board, said in an interview. ``The yuan's future trend depends on the euro's movement, and the trends of other major currencies.''

Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 per cent to 6.7125 per US dollar. The contracts reflect bets the currency will appreciate 1.7 per cent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 per cent on April 30 before a slump in the euro and a worsening of Europe's debt crisis eased pressure for appreciation.

``The central bank's statement means China's exit from the dollar peg,'' said Zhao Qingming, an analyst in Beijing at China Construction Bank, the nation's second-biggest bank by market value. ``If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.''

Deadline postponed

Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major US trading partners, which might have resulted in China being labeled a currency manipulator. China owned $US900 billion of US Treasuries as of April, the largest foreign holdings.

China's exports jumped 48.5 per cent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $US19.5 billion, from $US1.68 billion in April and a deficit of $US7.24 billion in March that was the first in six years.

China's narrowing balance-of-payments gap indicates that there's no basis for ``large-scale appreciation'' by the yuan, the central bank said in the English version of its statement. The Chinese version said no ``large-scale volatility.''

Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.

``Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,'' the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.

``China has to offer something ahead of the G-20,'' he said. ``Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.''

Bloomberg News