Baseball91's Weblog

June 19, 2010

The People’s Bank: It’s All about Chinese Currency

Filed under: Ben Benanke,Business,China,currency,Hu Jintao — baseball91 @ 6:16 PM
Tags: , ,

In a signal to financial markets one week prior to the Group of 20 meeting in Canada, the central bank of China announced in statement that it would allow greater flexibility in the value of the renminbi, the currency of China. Lacking any detail on how both the timing and the manner much the currency might rise, there is sensitivity in China especially to inflated housing prices and the competitiveness of Chinese exports in world markets, with millions of jobs in Chinese export factories. In its statement today, as five years before, the People’s Bank of China would be setting the value of the renminbi in relation to a basket of various currencies, not just the US dollar.

Historically, in July 2005, China had announced the decision of is central bank’s decision to begin allowing the renminbi to rise against the dollar. Over the next three years, the renminbi did then rise 21 percent up until the point of the bubble burst on Wall Street in September 2008. In a defensive measure, iInformally the central bank of China had repegged the renminbi at 6.83 to the dollar in July 2008, as the global financial system came apart, with the ensuing sliding worldwide demand for its goods triggered by the global financial crisis.

As stated, the timing and the manner of how much the currency might rise was not addressed. With the 2005 announcement, the new currency policy was accompanied by a one-time two percent rise in the currency against the dollar, to be followed by further gradual appreciation of the renminbi. But here was a government whose performance actually followed what it said. Though there was a missing transparency, the leadership in China did not go chasing oil spills for backdrops for news conferences, as has been the case in the United States since 1980.

Per the stated Chinese self-confidence from the statement on the People’s Bank of China website: “The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability.”

With $2.4 trillion in currency reserves, China’s problem was not much different than mine. If you had money, you had to put it somewhere. Playing the currency market itself, China’s exit from the dollar peg would suggest a protection of the holding which China has in the euro which its leaders had met to discuss duing the financial crisis of Greece. Because the euro is expected to gather strength when currency markets open Monday.

The underlying statement seems to be about increased economic activity in China, where according to customs bureau data overseas sales jumped 48.5 percent in May 2010 from one year ago. According to customs bureau data, exports exceeded imports by $19.5 billion.

According to a Business Week interview with People’s Bank of China’s policy board advisor Li Daokui, “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build. The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.”

Historically, Chinese culture has had a distrust of foreigners. Along that lines, vice foreign minister Cui Tiankai the day before this announcement said the value of the renminbi was not a subject for global discussion, with similar recent responses to foreign pressure indicating strong nationalistic sensitivities about currency policy by Chinese officials.



  1. August 11, 2010

    Inflation in China — measured by the consumer price index — spiked to its highest level this year, just as China reported industrial output slowed for the fifth consecutive month in July, reaching the lowest level this year. “The combination of weaker U.S. and Chinese growth will,” wrote Kathy Lien, director of currency research at Global Forex Trading in a note to investors, “hamper the global recovery in the fourth quarter. It is no secret that China has become an engine of growth for many parts of the world. However, if the U.S. economy hits a rough patch, this engine could slow to a halt.”

    That news, combined with the Federal Reserve’s bearish outlook on August 10, 2010, added steam to fears about a global economic slowdown. The Fed announced yesterday that it will take measures to stimulate the U.S. Economy. Some analysts had expected the Fed to unveil plans to resume a policy called quantitative easing, in outright purchases of U.S. debt, as a response to recent signs the economic recovery has slowed.

    In response, the dollar fell to a 15-year low against the Japanese yen Wednesday, as investors flocked to safe-haven trades after weak economic data was released by China and the Federal Reserve posted a bearish outlook. The dollar fell against the Japanese yen to around ¥84.91, but the dollar index inched up 1.4% against a bucket of several major currencies. The dollar traded at $1.30 against the euro and $1.57 against the British pound.

    The Fed had over $2 trillion worth of domestic securities on its balance sheet.

    Comment by baseball91 — August 11, 2010 @ 7:54 PM | Reply

  2. The European Commission revealed this week that it had approved government support worth €24.3bn (£20bn) Anglo Irish Bank (AIB), significantly higher than estimates by Dublin earlier this spring. With jitters from the escalating costs of Ireland’s rescue, Patrick Honohan, governor of Ireland’s central bank, formerly with the IMF and the World Bank, an arch-critic brought in in 2009 to clean house at the central bank, said, “If it hadn’t been for Anglo Irish Bank the losses would have been manageable. The net cost to the Irish state of recapitalizing the banks is €25bn, or 15% to 16% of Irish GDP. It is nearly all the result of AIB.”

    Ireland, certainly bold, has cut public wages by 13 percent (including pension levies). Known as “internal devaluation” in IMF parlance, this was the only option left to restore competitiveness for a country that cannot devalue its currency. The Irish budget deficit seems stuck at 14 percent of GDP, with unemployment up to 13.7perrcent. The severity of the slump is eating away at the tax base.

    Comment by paperlessworld — August 12, 2010 @ 2:59 AM | Reply

  3. Yield on the 10-year Irish bond jumped 15 basis points to 5.25 per cent. The two-year note yield rose six basis points to 2.80 per cent. The Irish-German 10-year yield spread widened 14 basis points, to 264 basis points, the most since July 23rd.

    Standard and Poor’s said yesterday with its BBB ranking for the bank’s debt, the second-lowest investment grade, that it’s keeping its ratings on Anglo Irish on credit watch with negative implications.

    Comment by paperlessworld — August 12, 2010 @ 3:10 AM | Reply

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