Consequences of a revaluation of the Yuan

[Imran Siddiqui]

They have no power to do that.

The Soviet Union did, so why wouldn't China not have the power to do so (though I don't have any idea whether they do or not).

[Kidlicious]

Originally posted by Imran Siddiqui

They have no power to do that.

The Soviet Union did, so why wouldn't China not have the power to do so (though I don't have any idea whether they do or not).

The Soviet Union did not trade the way the Chinese do. If the Chinese want the world to buy their goods they will have to allow them access to their currency. The supply and demand of your currency determines the price of your exported goods. That's the way the world trade system works.

[Imran Siddiqui]

The supply and demand of your currency determines the price of your exported goods.

Which is true... however that does not mean that the country has two currencies, like the USSR did. One for foreign markets and another totally internal.

And while the USSR didn't trade as much as the Chinese are, they did trade plenty.

[Kidlicious]

Originally posted by Imran Siddiqui

The supply and demand of your currency determines the price of your exported goods.

Which is true... however that does not mean that the country has two currencies, like the USSR did. One for foreign markets and another totally internal.

You lost me. What are we debating? These other guys are saying that the US$/rmb exchange rate is whatever the BoC says it is regardless of the supply and demand of the currencies. You have said that's not true.

[Imran Siddiqui]

What are we debating?

Whether a country has the power to make a currency internal use only, and can fix the price of that currency.

At least that is what Davout's quote seems to suggest.

[Kidlicious]

Originally posted by Imran Siddiqui

What are we debating?

Whether a country has the power to make a currency internal use only, and can fix the price of that currency.

At least that is what Davout's quote seems to suggest.

Yes a country can, but the Chinese can't. Not the way they trade internationally, they can't.

edit: actually if their currency is for internal use only, there is no reason to fix it's exchange rate.

[Kidlicious]

Here you go DAVOUT. I hope the verbage pleases you. They use the word 'mopping.'

Dollar decline slows on Asian buying

Asia is now emerging as the creditor of last resort. The US had a net capital inflow of $474 billion in 2002, out of which close to $200 billion were from Asia. Recently Japan and China made purchases worth $120 billion. This may be due to the general shift into safe-haven assets. Asian countries are facing upward pressure on the exchange rates on their currencies.

To stem the appreciation, central banks in these countries are mopping up dollars and have chosen to increase their foreign exchange reserves.

You are challenging me to find sources for this. See that because of upward pressure on the exchange rate that the BoC has to purchase dollars? If not let me know. I'll find the right verbage for you eventually.

[Tingkai]

Originally posted by Kidicious
The peg is not just a decision that the BoC makes. They have to maintain the fixed exchange rate by trading on the forex. Since the yuan gets stronger than the dollar they have to buy dollars on the forex.

There is absolutely no trading of the RMB. It is a controlled currency.

The BoC has a monopoly, unlike other currencies where the exchange rate is determined on the open market.

The only way you can buy rmb, or sell rmb is to go through the BoC or a Mainland commercial banks that acts as a middleman for the BoC. Any large exchange of RMB must have paperwork to explain why the exchange is being made. Commercial banks follow the rules because they don't want to break the law.

The open market for the RMB would not work. Let's say you're in the US and you buy 100,000 rmb. What are you going to do with it. The only place you can spend it is in Mainland China. You can't wire it to a bank there because that's illegal. You could smuggle it in, but that's illegal in the US and China. That's why everyone goes through the BoC.

Kidicious, everything you have stated about the RMB is wrong.

[Tingkai]

Originally posted by Kidicious
The Soviet Union did not trade the way the Chinese do. If the Chinese want the world to buy their goods they will have to allow them access to their currency. The supply and demand of your currency determines the price of your exported goods. That's the way the world trade system works.

You obviously have no idea how pegged exchange rates work.

Do you know anything about how the pegged exchange rate system works in Hong Kong?

[Kidlicious]

Originally posted by Tingkai
Kidicious, everything you have stated about the RMB is wrong.

How about you start showing some evidence?

[Kidlicious]

Originally posted by Tingkai
You obviously have no idea how pegged exchange rates work.

fixed exchange rate A system in which a country's exchange rate remains constant. Normally this means that the exchange rate between the country's currency and some other currency or basket of currencies stays within some small margin of fluctuation around a constant par value. A fixed exchange rate cannot be established by mere policy statements by the government or central bank issuing the currency. Effective policies to maintain a fixed rate and a credible commitment to stick to them are both needed. Maintenance of a fixed exchange rate requires that a country hold sufficient foreigh exchange reserves, which are used for intervention in the foreign exchange market to absorb small variations in willingness to hold its currency, and that monetary and fiscal policies are used sufficiently vigorously to keep these variations small.

-Oxford Dictionary of Economics

Case closed.

[Tingkai]

Very good. You know how to cut and paste. Now all you have to do is understand what you just posted.

What do you think Oxford means when it says.

A fixed exchange rate cannot be established by mere policy statements by the government or central bank issuing the currency. Effective policies to maintain a fixed rate and a credible commitment to stick to them are both needed.

Tell us how the following applies to China, where the willingness to hold the RMB is high.

Maintenance of a fixed exchange rate requires that a country hold sufficient foreigh exchange reserves, which are used for intervention in the foreign exchange market to absorb small variations in willingness to hold its currency,

Explain how the Hong Kong system uses monetary and fiscal policies to maintain the HK dollar peg.

and that monetary and fiscal policies are used sufficiently vigorously to keep these variations small.

If you can't expain these points then all you have done is cut and paste, and anyone can do that.

[DanS]

Tinkai: All of what you say seems true. However, am I right in saying that the perceived value of the Yuan does have an impact on money flows? If it is perceived that the Yuan will revalue higher, then hot money attempts to flow into China.

This speculative hot money adds directly to China's money supply, since basically the gov't is printing a set number of Yuan when they "buy" a dollar. China's money supply grows. China's reserves grow. The Yuan appears to be further undervalued. The trade surplus grows. Then the cycle begins again.

Isn't what China lost or will lose in this equation is the ability to set money supply, if they don't revalue periodically? A massive amount of money flowing into or out of the system will--sooner or later--cause either an overheated economy or an illiquid economy. If China really tamps down hard on fx transactions, that will cause chaos in the business community. And that's when companies may go to alternatives to the BoC to set a truer market price.

[DAVOUT]

Originally posted by DanS
Tinkai: All of what you say seems true. However, am I right in saying that the perceived value of the Yuan does have an impact on money flows? If it is perceived that the Yuan will revalue higher, then hot money attempts to flow into China.

This speculative hot money adds directly to China's money supply, since basically the gov't is printing a set number of Yuan when they "buy" a dollar. China's money supply grows. China's reserves grow. The Yuan appears to be further undervalued. The trade surplus grows. Then the cycle begins again.

Isn't what China lost or will lose in this equation is the ability to set money supply, if they don't revalue periodically? A massive amount of money flowing into or out of the system will--sooner or later--cause either an overheated economy or an illiquid economy. If China really tamps down hard on fx transactions, that will cause chaos in the business community. And that's when companies may go to alternatives to the BoC to set a truer market price.

DanS,

This would be a problem if the Chineses were not able to prevent the speculative hot money to enter. They control the outflow, but also the inflow; it is not easy to invest in China due to the regulations of the cash movements. However, the problem you suggest could also result from the authorized exports and autorized foreign investments in China, and it is one of the reasons why people advocate for a softening of the current system.

As a matter of fact, they have protected themselves from any possible speculation against their money.

[DAVOUT]

For those who are interested in what the foreign exchange systems really are :

http://www.imf.org/external/np/speeches/2001/010601a.htm