China Said to Consider Yuan Trading Versus Ruble, Won

[hugolp]

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6zAb_1PqxFY&pos=6

China Said to Consider Yuan Trading Versus Ruble, Won

April 7 (Bloomberg) -- China is considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in cross-border trade, an official at the China Foreign Exchange Trade System said.

The People’s Bank of China is investigating the possibility of offering new currency pairs, said an official at the Shanghai-based interbank exchange, a subsidiary of the central bank. He asked not to be identified as authorities have yet to make a final decision. Traders now can buy or sell the yuan against the dollar, the euro, the yen, the Hong Kong dollar and the British pound.

“That would be a further step towards making the yuan an international currency,” said Liu Dongliang, a Shenzhen-based foreign-exchange analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “The move would help foreign companies buy or sell the yuan at lower costs.”

China is seeking greater use of its currency to reduce reliance on the U.S. dollar after Premier Wen Jiabao said last month he is “worried” about holdings of assets denominated in the greenback. From July, the government started allowing companies in Shanghai and four cities in the southern province of Guangdong to use yuan in cross-border trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations.

President Barack Obama will keep pressing China to end the yuan’s 21-month-old peg to the dollar and may bring up the topic when he meets Chinese President Hu Jintao next week, spokesman Robert Gibbs said yesterday. Executives at Chinese banks have backed a stronger currency to allow it to play an increased role in global trade and spur growth in financial markets.

Critical Meetings

China’s currency has been held at around 6.83 to the dollar since July 2008, after appreciating 21 percent in the previous three years. Twelve-month non-deliverable forwards traded at 6.6355 per dollar, reflecting bets the currency will climb 2.9 percent from the spot rate of 6.8254 in the coming year.

The ruble was little changed at 29.3048 per dollar. Sergei Shvetsov, the head of the Russian central bank’s financial operations department, said yuan-ruble trading was unlikely to have any impact on his own currency’s value.

U.S. Treasury Secretary Timothy F. Geithner last weekend announced the postponement of the April 15 deadline for an annual foreign-exchange policy review, which may have resulted in China being labeled a currency manipulator. He said meetings over the next three months will be “critical” to bringing policy changes that lead to a more balanced global economy.

Opening Up

“They’re becoming more open to the world, and with that, you’re going to see the currency take on a broader role internationally,” Geithner said in an interview with Bloomberg Television to be aired today. “That’s a healthy, necessary adjustment.”

Expectations that China’s currency will appreciate drove yuan trade settlements to 7 billion yuan ($1 billion) in the first two months of this year, almost twice the 3.6 billion yuan in the second half of 2009, Zhang Yanling, vice chairman of Beijing-based Bank of China Ltd., the nation’s biggest foreign- currency lender, said in a March 19 interview.

“If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar,” she said.

Mounting Reserves

Since December 2008, China has set up 650 billion yuan worth of swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Belarus and Argentina, broadening access to the yuan. The central bank has also proposed expanding the use of International Monetary Fund depository receipts in reserves instead of dollars.

“They’re trying to encourage yuan trade settlement, so it would make sense to commit to more trading pairs,” said Ben Simpfendorfer, Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc. “It would be a natural part of the growing convertibility of the yuan and a step towards widening the use of the yuan. Convertibility of the yuan is a long-term change, but China is taking all the right steps.”

China’s dollar purchases to maintain the currency link have driven currency reserves to $2.4 trillion. Chinese investors held $889 billion of Treasuries in January, the biggest overseas holdings of such debt.

It will take 15 to 20 years to make the yuan an international currency, Dai Xianglong, chairman of the National Council for Social Security Fund and a former central bank governor, said April 2.

 

[Stary Hickory]

Someone explain exactly how China "pegs" it's currency to the Dollar. I really want to understand the claims of "currency manipulation" that I am hearing. I understand that fundamentally this is not really possible. As it still remains a voluntary exchange.

 

[hugolp]

Stary Hickory, basically it goes like this:

- USA prints dollars and buys chinese products with them (this is a bit more complicated, but will do to expalin this).
- The chinese goverment prints yuans and with those yuans buys the dollars that are in the chinese economy.
- The chinese goverment uses this dollars mainly to buy US bonds, so this dollars go back to the USA goverment, that now spends them in the USA economy.

That way the chinese goverment stops the value of the dollar from falling in respect to the Yuan, because both the Yuan and the dollar devaluates at the same speed (the key is when the chinese goverment buys the dollars that the USA sends with printed yuans). The reality is that both the USA goverment and the Chinese goverment are manipulating their currencies.

The chinese card is just being played by Obama to try to focus the blame of the people on someone else.

 

[Yukon Cornelius]

Stary Hickory, basically it goes like this:

- USA prints dollars and buys chinese products with them (this is a bit more complicated, but will do to expalin this).
- The chinese goverment prints yuans and with those yuans buys the dollars that are in the chinese economy.
- The chinese goverment uses this dollars mainly to buy US bonds, so this dollars go back to the USA goverment, that now spends them in the USA economy.

That way the chinese goverment stops the value of the dollar from falling in respect to the Yuan, because both the Yuan and the dollar devaluates at the same speed (the key is when the chinese goverment buys the dollars that the USA sends with printed yuans). The reality is that both the USA goverment and the Chinese goverment are manipulating their currencies.

The chinese card is just being played by Obama to try to focus the blame of the people on someone else.

Thanks for this. I am always struggling and can't seem to wrap my head around the USA/CHINA relationship. This helps.

 

[Stary Hickory]

Stary Hickory, basically it goes like this:

- USA prints dollars and buys chinese products with them (this is a bit more complicated, but will do to expalin this).
- The chinese goverment prints yuans and with those yuans buys the dollars that are in the chinese economy.
- The chinese goverment uses this dollars mainly to buy US bonds, so this dollars go back to the USA goverment, that now spends them in the USA economy.

That way the chinese goverment stops the value of the dollar from falling in respect to the Yuan, because both the Yuan and the dollar devaluates at the same speed (the key is when the chinese goverment buys the dollars that the USA sends with printed yuans). The reality is that both the USA goverment and the Chinese goverment are manipulating their currencies.

The chinese card is just being played by Obama to try to focus the blame of the people on someone else.

Ok so basically the Chinese inflate at a 1:1 ratio with the US. This is kind of what I expected. It's odd though. Still the problem lies in the fact we borrow money. If we did not run deficits the that we do there would be no problems with the currencies.

 

[hugolp]

Ok so basically the Chinese inflate at a 1:1 ratio with the US. This is kind of what I expected. It's odd though. Still the problem lies in the fact we borrow money. If we did not run deficits the that we do there would be no problems with the currencies.

Exactly. And that is why it is very hipocritical to blame the chinese.

Also, this inflationary policy is making the USA industries go to China, and its the main reasons the jobs are going to China.

 

[Stary Hickory]

Exactly. And that is why it is very hipocritical to blame the chinese.

Also, this inflationary policy is making the USA industries go to China, and its the main reasons the jobs are going to China.

This I understand, and I want to write soemthing about it specifically. I want to write an entire book on Austrian Eocnomics in a very easy to understand laymen way. But to do this I need to understand more. The areas in which I lack are our dealings internationally.

I know that inflation is causing jobs to go overseas. And if Austrians could develop this argument better and deliver it effectively we could really put a lot of pressure on the FED. Maybe establish hard money. I am keenly aware of the areas in which I am weak and I have yet to see a very unified and well defined Austrian view on trade deficits and how inflation drives out American business.

 

[gonegolfin]

Someone explain exactly how China "pegs" it's currency to the Dollar. I really want to understand the claims of "currency manipulation" that I am hearing. I understand that fundamentally this is not really possible. As it still remains a voluntary exchange.

I covered this here ...

http://www.ronpaulforums.com/showpost.php?p=2534182&postcount=11


From 2/8/10 ...

"Let's see if I can alleviate the confusion ...

also covered more briefly here ... http://www.ronpaulforums.com/showpos...13&postcount=8

When the US pays for Chinese exports, it does so by purchasing Yuan (using Dollars) on the foreign exchange market (see Note: below). This results in a rising Yuan ... which makes sense since a net trade surplus results in net demand for the net trade surplus currency (in this case, the Yuan). But the Chinese want to keep the export sector growing (they are still an export driven economy) and this will not happen with continued growing strength in the Yuan (trade would eventually balance back). So, the Chinese central bank intervenes and creates ("prints") Yuan to buy US Dollars. This artificially devalues the Yuan and provides an artificial boost to the Chinese export sector (keeping the value of their currency lower than it would normally be without the intervention). This is why the Chinese central bank has so many US Dollar denominated foreign reserves ... they created them. Now that they have created them, they are stuck trying to determine the best investment choice for them.

So on one side, you have the US complaining (legitimately) about the Chinese manipulating their currency. But in the same breath, the US is lobbying for more investment in its debt (sorry, cannot have it both ways).

On the other side, you have the Chinese complaining (legitimately) about the US devaluing its currency and making Chinese investments in US Dollar denominated assets less stable. But in the same breath, the Chinese continue to print Yuan to buy Dollars due to their trade surplus. The Chinese can solve their own problem by not printing Yuan to buy Dollars. But like the US, they want it both ways.


Note: Even if a Chinese exporter accepts US Dollars without first converting to Yuan, the result is still the same ... these Dollars will be subsequently exchanged for Yuan on the foreign exchange market."


Brian

 

[gonegolfin]

Ok so basically the Chinese inflate at a 1:1 ratio with the US. This is kind of what I expected. It's odd though. Still the problem lies in the fact we borrow money. If we did not run deficits the that we do there would be no problems with the currencies.

This is not true. The Chinese could still buy Dollars with newly created Yuan. They simply might be required to find an investment other than US Treasuries ... or the competition for US treasuries would be fierce, driving down yields.

Brian

 

[hugolp]

I know that inflation is causing jobs to go overseas. And if Austrians could develop this argument better and deliver it effectively we could really put a lot of pressure on the FED. Maybe establish hard money. I am keenly aware of the areas in which I am weak and I have yet to see a very unified and well defined Austrian view on trade deficits and how inflation drives out American business.

I too find it hard to explain in easy words how inflation causes jobs to go overseas. Its not easy.

 

[Stary Hickory]

I too find it hard to explain in easy words how inflation causes jobs to go overseas. Its not easy.

Yep I figured as much because no Austrians have done this satisfactory. I am able to break down most things into easy to understand concepts but the inflation/loss of jobs thing is harder for me too. So I am seeking info on this.

I see where Brian posted some stuff let me peruse.

Thanks for help

 

[gonegolfin]

Stary Hickory, basically it goes like this:

- USA prints dollars and buys chinese products with them (this is a bit more complicated, but will do to expalin this).

The bolded portion above is incorrect.

- The chinese goverment prints yuans and with those yuans buys the dollars that are in the chinese economy.

To be painfully accurate, it is not the dollars that are in the chinese economy that are purchased. The Chinese Central Bank executes purchases of US Dollars, in an amount it deems necessary to implement its peg, in the foreign exchange market. These purchased US Dollars then become US Dollar denominated foreign reserves for the Chinese and are subsequently invested in some US$ denominated asset(s).

- The chinese goverment uses this dollars mainly to buy US bonds, so this dollars go back to the USA goverment, that now spends them in the USA economy.

These US dollars were already in the economy. There is no inflation here.

These days, the Chinese are mostly purchasing bills and notes ... very few bonds. A few years ago, purchases were across the yield curve (many more bonds) along with a healthy helping of both Agency debt and Agency MBSs.

Brian

 

[hugolp]

- USA prints dollars and buys chinese products with them (this is a bit more complicated, but will do to expalin this).
The bolded portion above is incorrect.

I know, that is why I said that its more complicated than that. But the fact of the matter is that the USA can only keep on "printing" dollars because the chinese are buying the USA gov debt. Otherwise prices would rise a lot quicker. So you can say that the USA is "printing" dollars to pay for chinese products.

 

[Stary Hickory]

These days, the Chinese are mostly purchasing bills and notes ... very few bonds. A few years ago, purchases were across the yield curve (many more bonds) along with a healthy helping of both Agency debt and Agency MBSs.

Brian

So these days the Chinese are not investing much at all anymore but simply trying to keep parity with the peg and prevent a Yuan devaluation.

I get the concept here, any insights on why inflation drives jobs overseas? I know it's connected with the fact that instead of producing we are borrowing. I also know that this causes wealth distribution to distort and go to the politically connected and banker cartel.

I just need to understand the specifics.

 

[Stary Hickory]

I know, that is why I said that its more complicated than that. But the fact of the matter is that the USA can only keep on "printing" dollars because the chinese are buying the USA gov debt. Otherwise prices would rise a lot quicker. So you can say that the USA is "printing" dollars to pay for chinese products.

Yes and this also means we have exported inflation overseas to China. I have the broad concepts pretty well covered.