The undervaluation of the renminbi : EU point of view

[DanS]

Well, who's to say that a liberalized Yuan market would not have had the same or better stabilizing impact?

With regard to whether we can oblige the Chinese to do one thing or another, of course we can't. It was the "because it would open the door to international speculation which is dramatically disruptive for a developping country" opinion that raised the red flag (so to speak).

[Kidlicious]

Originally posted by DanS
Well, who's to say that a liberalized Yuan market would not have had the same or better stabilizing impact?

With regard to whether we can oblige the Chinese to do one thing or another, of course we can't. It was the "a liberal market is harmful for developing countries" opinion that raised the red flag (so to speak).

It was the confidence in the Chinese govt to control their currency that prevented the crisis from spreading to China. How would liberalization have a better effect?

[DanS]

It was the confidence in the Chinese govt to control their currency that prevented the crisis from spreading to China.

Who's to say that China's resolve to control its currency wasn't just incidental? Perhaps China just didn't have excessive economic imbalances that needed working out.

[DAVOUT]

Originally posted by DanS
It was the "because it would open the door to international speculation which is dramatically disruptive for a developping country" opinion that raised the red flag (so to speak).

I dont see how you can deny my statement. An economy as strong as the US$ supports a currency which has lost 28% of its value against the € in 20 months for reasons which have nothing to do with the relative strength of both economies and are therefore pertaining to the category of international speculation. The $ and the US economy are strong enough to resist and recover, but it demonstrates the magnitude of that phenomenon. A developping country submitted to a much smaller attack would loose its reserves in a very short time and call for help.

Recognizing that is not marxist is simply objective. One way to convince yourself is to observe the actual situation : most of the developping countries, closely watched and assisted by the IMF, have a currency protected one way or another from the outside.

[DanS]

An economy as strong as the US$ supports a currency which has lost 28% of its value against the € in 20 months for reasons which have nothing to do with the relative strength of both economies and are therefore pertaining to the category of international speculation.

While it has nothing to do with the relative strength of our economies, it seems to have everything to do with the imbalances in some of our accounts. Is arbitrage now considered international speculation?

[DAVOUT]

Originally posted by DanS


Is arbitrage now considered international speculation?

If we define speculation as an operation aiming at a profit at the risk of a loss, arbitrage is definitely speculation, and even the biggest part of it. In a currency crisis, the holders of the currency under attack arbitrage it against foreign currencies.

The other type of speculation is the short selling of the currency, easier to control since it requires to borrow first the attacked currency, which can be quickly forbidden.

[DanS]

If we define speculation as an operation aiming at a profit at the risk of a loss, arbitrage is definitely speculation, and even the biggest part of it.

Well, then at least some speculators are providing a valuable service here. The end game is to seek a level that corrects our imbalances, right?

Why do we seek to stop developing countries from taking advantage of these tools?

[DAVOUT]

Originally posted by DanS


Well, then at least some speculators are providing a valuable service here. The end game is to seek a level that corrects our imbalances, right?

Why do we seek to stop developing countries from taking advantage of these tools?

I am not talking PC, therefore speculator and speculation are not bad words for me ! They have a marginal utility.

The problem with the developping countries is that they associate a weak currency with a comparatively small economy and insufficient reserves; therefore, the speculation will not be stopped before the kill which takes the form of a devaluation large enough to convince foreign investors to send their money back, IMF loans helping to rebuild the central bank reserves.

[DanS]

I am not talking PC, therefore speculator and speculation are not bad words for me !

That's doesn't seem to jibe squarely with this...

"because it would open the door to international speculation which is dramatically disruptive for a developping country"

Some situations, maybe.

When you talk about the following, I can see where you're coming from in some situations, but certainly not all, and maybe not even a majority...

The problem with the developping countries is that they associate a weak currency with a comparatively small economy and insufficient reserves; therefore, the speculation will not be stopped before the kill which takes the form of a devaluation large enough to convince foreign investors to send their money back, IMF loans helping to rebuild the central bank reserves.

Are you really saying that a liberalized Chinese currency market would be any more susceptible to a run than the Aussie dollar, for instance?

[DAVOUT]

Originally posted by DanS


Are you really saying that a liberalized Chinese currency market would be any more susceptible to a run than the Aussie dollar, for instance?

The Chinese have decided that they did not want to take the risk. Dont forget the famous Soros speculation against the £ which ended by a devaluation. The consequences could be much worse for an economy not yet stabilized than it was for the UK.

Are the Chinese excessively cautious, or are they prevented to move by the remaining weaknesses of their country, such as the underdevelopped banking system, the obsolete state owned industry, the unemployment, ... , could be, but China is so big that I am afraid the problems are big too.

[Kidlicious]

Originally posted by DanS


Who's to say that China's resolve to control its currency wasn't just incidental? Perhaps China just didn't have excessive economic imbalances that needed working out.

Do you agree that more control = less imbalance?


The thing is that it's hard to tell how imbalanced the Chinese economy is. That should deter investment, but strangly it doesn't seem to. I don't think investors are so worried about imbalances in a controled economy if they have confidence that the govt can deal with them and keep them to a minimum.

On the other hand, in a relative free market situation investors know that a run can not be prevented and this fuels the fire. Investors have no confidence in the long term conditions.

[DanS]

Are the Chinese excessively cautious, or are they prevented to move by the remaining weaknesses of their country, such as the underdevelopped banking system, the obsolete state owned industry, the unemployment, ... , could be, but China is so big that I am afraid the problems are big too.

OK, the heart of the issue is that China is not availing itself of the advantages of a market. At the same time, China did not take part in the Asian meltdown. But to take from those circumstances that China did not take part in the Asian meltdown because it did not have a currency market is fallacious. Further, to insinuate that this is somehow indicative of market failure where no market existed smacks of rank socialism.

That's why GP's post was right on the money. You seem to have little faith in markets. If you do have faith in markets, then explain yourself!

Dont forget the famous Soros speculation against the £ which ended by a devaluation.

Yes, China has about as large of an economy as the UK on a currency conversion basis, I guess. The pound is still traded on the currency markets despite the meltdown, of course, much to the UK's benefit.

[DAVOUT]

OK, the heart of the issue is that China is not availing itself of the advantages of a market. At the same time, China did not take part in the Asian meltdown. But to take from those circumstances that China did not take part in the Asian meltdown because it did not have a currency market is fallacious. Further, to insinuate that this is somehow indicative of market failure where no market existed smacks of rank socialism.

Your desire to put an infamous label on any observation regarding the market disagreeing with your simplistic views makes a discussion difficult. Anyway, I must insist that it quite usual to compare the benefits of a system (the market), with those of another system (the absence of market) in order to understand their respective effects; this is not socialist, it is a method.

And I confirm that it is a quite common presumption among expert that China did not take part in the meltdown because it was protected by its foreign exchange arrangement.

That's why GP's post was right on the money. You seem to have little faith in markets. If you do have faith in markets, then explain yourself!

I cant find GP post on this thread.

I kindly ask you not to look for faith in my statements about economy in general and particularly about foreign exchange. Markets are more useful when they are looked at for what they are, that is places (material or immaterial) summarizing the exchanges resulting from the activity of men, and tending to equilibrium, although sometimes they fail. The faith you are talking about would consist of blindly believing that markets ALWAYS reach equilibrium which is not true.

Yes, China has about as large of an economy as the UK on a currency conversion basis, I guess. The pound is still traded on the currency markets despite the meltdown, of course, much to the UK's benefit.

You seem not to realize that a devaluation made when under attack has some unpleasant consequences, extremely costly for all holders of this currency not participating in the attack; it is far from being free of charge, somebody had to pay for the gain of Soros. The fact that the pound recovered in the following years could only demonstrate that the speculation alone was able to bend the BoE, without fundamental reasons.

[DanS]

This is getting a little tiresome, because I'm out of my element. But I'm interested enough in your thoughts to think that it's worthwhile pushing a little more.

Your desire to put an infamous label on any observation regarding the market disagreeing with your simplistic views makes a discussion difficult.

I don't know how you have adequate knowledge of my views to label them simplistic.

Anyway, I must insist that it quite usual to compare the benefits of a system (the market), with those of another system (the absence of market) in order to understand their respective effects

But you didn't do that in this situation. You seem to assume a failed Chinese currency market when making the comparison. Why?

And I confirm that it is a quite common presumption among expert that China did not take part in the meltdown because it was protected by its foreign exchange arrangement.

It could have not taken part if it had a freely traded currency as well. Indeed, it might be that a freely traded Yuan would have stabilized the other Asian currency markets. Has anybody done a study on this?

I cant find GP post on this thread.

TCO = The Poster Formerly Known As GP

Markets are more useful when they are looked at for what they are, that is places (material or immaterial) summarizing the exchanges resulting from the activity of men, and tending to equilibrium, although sometimes they fail. The faith you are talking about would consist of blindly believing that markets ALWAYS reach equilibrium which is not true.

This is a strawman. Where did I indicate that faith in the markets means blindly believing that markets always reach equilibrium?

The fact that the pound recovered in the following years could only demonstrate that the speculation alone was able to bend the BoE, without fundamental reasons.

I seem to remember that the fundamental reasons worked themselves out in the meantime (if you have a clearer memory, then I would be interested in knowing how you remember it). Indeed, wasn't the UK's solution to have a more flexible currency, rather than less?

Soros and his ilk were the instigators, but it's not as if they didn't recognize imbalances that they believed they could take advantage of. And since we've established that speculators provide a valuable service...

[Kidlicious]

DanS,

Didn't you accuse him of being a communist for favoring any control of markets? And aren't you now saying that you yourself favor control of markets in some cases?