The above analysis suggests two broad conclusions of relevance to U.S. policymakers. First, China’s exchange-rate policy is deeply linked to long-term development goals, and there is very little that the United States, or any other outside actor, can do to influence this policy. Second, the same suspicion of market forces that leads Beijing to pursue an export-led growth policy that generates large foreign reserve holdings also means that Beijing is unlikely to be willing to permit the financial market opening required to make the RMB a serious rival to the dollar as an international reserve currency. A related observation is that an average annual appreciation of the RMB against the dollar of about 5 percent now seems to be firmly embedded in Chinese policy. An appreciation of this magnitude enables China to maintain export competitiveness while achieving two other objectives: keeping domestic consumer-price inflation under control and gradually forcing an upgrade of China’s industrial structure.

Generally speaking, these trends are quite benign from a U.S. perspective. In substantive terms, there is little to be gained from high-profile pressure on China to accelerate the pace of RMB appreciation, because the United States possesses no leverage that can be plausibly brought to bear. Although the persistent undervaluation of the RMB will present increasing difficulties for American manufacturers of high-end equipment, as Chinese manufacturers gradually become more competitive in these sectors, the steady appreciation of the currency will increase the purchasing power of the average Chinese consumer and the total size of the Chinese consumer market. U.S. policy should therefore de-emphasize the exchange rate, where the potential for success is limited, and instead focus on keeping the pressure on China to maintain and expand market access for American firms in the domestic Chinese market — which in principle is provided for under the terms of China’s accession to the World Trade Organization.

This soothing tone is echoed in two other recent pieces at Foreign Policy and a New York Times op-ed by vice president Joe Biden (via CDT).

While arguing that a lot must change before the yuan can become a viable international reserve currency, Kroeber acknowledges recent steps towards its internationalisation. The current edition of The Economist notes London’s subsequent rush to embrace the redback:

WHEN the pound sterling reigned as the world’s dominant international currency, the City of London claimed the lion’s share of the market for sterling bills of exchange, with which foreigners financed their cross-border trade and investment. After sterling was toppled by the greenback, London then invented the “euro-dollar” market, which allowed people to deposit dollars and borrow them in an offshore market beyond the reach of America’s capital controls. London’s banks are now readying themselves to profit from the growing offshore market in China’s currency, the yuan.

According to the Financial Times, Wang Qishan, a Chinese vice-premier, was due to give China’s official blessing to London’s efforts during a visit to Britain this week. The offshore business is still in its infancy, but is growing fast. China now allows yuan to circulate freely outside its borders, but not across them. Foreigners must earn yuan by selling goods to China or, in some cases, direct stakes in their companies. They can deposit these yuan in banks offshore, or invest them in offshore bonds, but they cannot invest them on the mainland without the government’s permission ….

London can boast great depth of experience in foreign exchange and a convenient time zone. Now all it needs is a deep pool of yuan deposits, a generous swap line with the PBOC, an enticing menu of yuan securities, and a catchy, local name with which to market them. Egg-fried bonds, anyone?

Sources:

The Renminbi: The Political Economy of a Currency – Foreign Policy
The redback abroad: Offshore thing – The Economist

© Samuel Wade for China Digital Times (CDT), 2011. | Permalink | No comment | Add to del.icio.us
Post tags: currency manipulation, exchange rates, London, renminbi, renminbi rate, renminbi revaluation, reserve currency, United States, yuan trading, yuan value
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The People’s Bank of China raised interest rates three times this year and boosted lenders’ reserve-requirement ratios on six occasions, exacerbating a cash crunch that’s driving bond yields higher and making local assets more attractive to overseas investors. U.S. Treasury yields are falling amid signs the economic recovery is losing momentum. Gross domestic product rose 1.6 percent in the second quarter, compared with growth of 9.5 percent in China, official data show.

“U.S. Treasury yields have eased on growth concerns, while China remains characterized by a strong GDP outlook, still high inflation and a relatively tight monetary stance,” said Delphine Arrighi, a Hong Kong-based rates strategist at Standard Chartered Plc. “It is an incentive to bring funds into China, which is why the central bank monitors this very closely.”

Despite the rising value of the yuan, an advisor to China’s central bank remarked that the yuan will not be a major reserve currency in the next decade. From Reuters:

Confidence in the dollar and the U.S. economy has taken a beating after the United States narrowly escaped a disastrous debt default this week, running the risk of losing its gold-plated credit rating.

Xia’s prediction for the yuan’s future contrasts with others in China who, worried about the dollar’s prospects, have called for alternative reserve currencies, including the yuan.

Xia did not elaborate on why he thought the yuan would not grow into a major reserve currency, but made clear that Beijing should stick to its present model of a managed floating currency regime to shield its economy from risks.

Without giving details, he said China should not have a free float currency regime in the next 10 years, and that while its capital account must be freed to make the yuan convertible, capital controls should only be loosened gradually.

Dagong Global Credit Rating Company, a Chinese agency, downgraded the United States from A+ to A, signifying growing concerns over Washington’s long-term ability to repay its debts. From CNN:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,” Dagong Chairman Guan Jianzhong told CNN.

“The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,” he said.

Ironically, Dagong’s move could hurt not just the United States but also China, the largest foreign owner of U.S. debt with holdings worth almost $1.2 trillion.

“Our downgrade simply reflects reality,” Guan said. “Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.”

© zhou shuren for China Digital Times (CDT), 2011. | Permalink | No comment | Add to del.icio.us
Post tags: bonds, credit rating, currency, Economy, inflation, interest rates, renminbi rate, renminbi revaluation, reserve currency, US debt, yuan
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China will maintain a weak yuan until its export sector has recovered from the global crisis, prioritising concerns at home despite growing pressure from its major trading partners, analysts say.

The United States and European Union have been pushing China to let the yuan fluctuate, but their calls have so far fallen on deaf ears as Beijing is focused on creating enough jobs to avert social unrest, they said.

“Their focus is domestic issues, not foreign issues,” Ben Simpfendorfer, a Hong Kong-based economist at the Royal Bank of Scotland, told AFP.

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The full article is here.

© Xiao Qiang for China Digital Times (CDT), 2004. | Permalink | No comment | Add to del.icio.us
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“China made its debut last night in the club of the world’s leading economic powers, as international pressure mounts to change a decade-old currency peg that critics accuse of giving Chinese products an unfair competitive edge. ”

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Post tags: G-7, renminbi rate, Yuan rate
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