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Archive for the ‘currency’ Category

10 China Myths for the New Decade – Abstract

Posted by Author on January 30, 2010


Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via http://www.heritage.org, January 28, 2010 –

Abstract: China’s economic growth has been accompanied by growing misinformation about its economy. Contrary to conventional wisdom, China is not leading the world out of a recession, is no longer moving toward a market economy, is not America’s banker, and may never surpass the U.S. Heritage Foundation Asia expert Derek Scissors debunks 10 leading myths about the Chinese economy and replaces them with the accurate picture necessary to guide American policy.

The Chinese economy may still be growing rapidly despite the financial crisis. One thing that has been growing even faster is misinformation about the Chinese economy.

This is partly a function of unreliable economic numbers put out by China’s government, but it is also partly a function of mistaken American and other perceptions. Hidden within the sweeping pronouncements of “China’s decade” and “China’s century” are important, specific points–some of which turn out to be demonstrably wrong.

The foundation of good policy is good information. If the U.S. is to respond wisely to the rise of the People’s Republic of China (PRC), the actual speed and nature of that rise must be correctly understood. Exaggerating Chinese prowess and emphasizing the wrong issues leads to general mistakes in U.S. economic and foreign policy, and to an incoherent China strategy.

It turns out that China is not leading the world out of recession, is not nipping at America’s economic heels, is not America’s banker, is not becoming more consumption-driven, and is not controlling its carbon emissions. Instead, Chinese growth for the moment comes at the expense of global growth, the U.S. has stronger long-term economic fundamentals than China, Chinese bond purchases appear unimportant, China is more investment-dependent than ever, and is by far the world’s largest greenhouse emitter.

The American position is thus considerably stronger relative to China than commonly believed. However, it is also the case that the policy challenges, such as inducing genuine economic reform in the PRC, are more daunting. It will be more difficult for the U.S. to avoid the pitfalls of superficial changes, such as in exchange rates and carbon intensities, to make progress toward a Chinese economy that genuinely does boost world growth.(to be cont’d)

Original from The Heritage Foundation

Posted in China, currency, Economy, GDP, Investment, News, Opinion, Social, Trade, World | 1 Comment »

China central bank only has $3.2 billion capital, needs an infusion

Posted by Author on September 8, 2008


By KEITH BRADSHER, The New York Times, US, September 4, 2008 –

HONG KONG — China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.

Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People’s Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.

The central bank’s predicament has several repercussions. For one, it makes it less likely that China will allow the yuan to continue rising against the dollar, say central banking experts. This could heighten trade tensions with the United States. The Bush administration and many Democrats in Congress have sought a stronger yuan to reduce the competitiveness of Chinese exports and trim the American trade deficit.

The central bank has been the main advocate within China for a stronger yuan. But it now finds itself increasingly beholden to the finance ministry, which has tended to oppose a stronger yuan. As the yuan slips in value, China’s exports gain an edge over the goods of other countries.

The two bureaucracies have been ferocious rivals. Accepting an injection of capital from the finance ministry could reduce the independence of the central bank, said Eswar S. Prasad, the former division chief for China at the International Monetary Fund.

“Central banks hate doing that because it puts them more under the thumb of the finance ministry,” he said.

Mr. Prasad said that during his trips to Beijing on behalf of the I.M.F., he had repeatedly cautioned China over the enormous scale of its holdings of American bonds, emphasizing that it left China vulnerable to losses from either a strengthening of the yuan or from a rise in American interest rates. When interest rates rise, the prices of bonds fall.

Officials at the central bank declined to comment, while finance ministry officials did not respond to calls or questions via fax seeking comment. Data in a study by the Bank of International Settlements based in Basel, Switzerland, sometimes called the central bank for central banks, shows that many central banks had small capital bases relative to foreign reserves at the end of 2002, though few were as low as the People’s Bank of China.

Given the poor performance of foreign bonds, the Chinese government could decide to shift some of its foreign exchange reserves into global stock markets.

The central bank started making modest purchases of foreign stocks last winter, but has kept almost all of its reserves in bonds, like other central banks.

The finance ministry, however, has pushed for investments in overseas stocks. Last year, it wrested control of the $200 billion China Investment Corporation, which had been bankrolled by the central bank. That corporation’s most publicized move, a $3 billion investment in the Blackstone Group in May of last year, has lost more than 43 percent of its value.

The central bank’s difficulties do not, by themselves, pose a threat to the economy, economists agree. The government has ample resources and is running a budget surplus. Most likely, the finance ministry would simply transfer bonds of other Chinese government agencies to the bank to increase its capital. But even in a country that strongly discourages criticism of its economic policies, hints of dissatisfaction are appearing over China’s foreign investments.

For instance, a Chinese blogger complained last month, “It is as if China has made a gift to the United States Navy of 200 brand new aircraft carriers.”

Bankers estimate that $1 trillion of China’s total foreign exchange reserves of $1.8 trillion are in American securities. With aircraft carriers costing up to $5 billion apiece, $1 trillion would, in theory, buy 200 of them.

By buying United States bonds, the Chinese government has been investing a large chunk of the country’s savings in assets earning just 3 percent annually in dollars. And those low returns turn into real declines of about 10 percent a year after factoring in inflation and the yuan’s appreciation against the dollar.

The yuan has risen 21 percent against the dollar since China stopped pegging its currency to the dollar in July 2005.

The actual declines in value of the central bank’s various investments are a carefully guarded state secret.

Still China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar. (…… more details from The New York Times)

Posted in China, currency, Economy, Investment, News, Politics, Stock, USA, World | Comments Off on China central bank only has $3.2 billion capital, needs an infusion

China’s Currency Black Market

Posted by Author on November 26, 2007


A woman’s arrest sheds light on how the Chinese evade currency controls

The Economist, Nov 22nd 2007-

HONG KONG- SINCE a police raid on her firm was broadcast on Chinese state television, To Ling has emerged as one of China’s more intriguing financiers. The 43-year-old Hong Kong resident operated a black-market foreign-exchange business with an outlet in Hong Kong, four branches on the mainland, and a client list that included China National Petroleum and Sinopec, two state-run monoliths. Her firm handled transactions worth more than $1m a day. Now she has landed in jail.

The crackdown on her operations in mid-November has exposed how hard it has become for the Chinese authorities to keep a tight rein on capital flows. Chinese citizens, with well honed trading instincts, have spotted a glaring arbitrage opportunity: subsidised petrol on one side of the border that Hong Kong residents want to get their hands upon, and cheap shares in Hong Kong, compared with their mainland counterparts, that Chinese investors want to buy. Officially, both are off limits to the other. That is where Ms To stepped in, providing the currencies both communities needed to do deals.

The publicity given to the raid was clearly meant to be a deterrent. As part of the November crackdown under instructions from the Shenzhen branch of China’s central bank, limits were placed on cash withdrawals to stop illicit funds from being carried over the border. Wen Jiabao, the prime minister, acknowledged on November 19th that vast amounts of currency were flowing out of China through illegal channels, about half from Shenzhen. This, he said, threatened the stability of both China and Hong Kong.

But what else can China expect? Its economy is increasingly integral to world trade, and benefits enormously from it. Yet it has foreign-exchange controls befitting an insular country, and pressures are mounting to get around them. Hesitantly, the government has sought to establish mechanisms, such as limited rights for Chinese fund managers to invest abroad, that would allow funds to seep out of the country. But they have not come to much.

In August the idea was floated to allow people in Tianjin, a Chinese municipality, to invest in Hong Kong shares, the so-called “through train.” Hong Kong share prices immediately soared. But the proposal has since stalled because of the complicated logistics involved. Hong Kong share prices have retreated as a result, and had a particularly bad time after the announcement that cash withdrawals from Shenzhen would be capped.

There are other ingenious ways of side-stepping the authorities. One is transfer pricing, involving the export of products from China at a particularly low price to a friendly and lightly taxed country (such as Singapore or Hong Kong), and then re-exporting them at a higher price to a third destination.

Another is via the gambling dens of Macau. Meanwhile, the gradual climb in the value of the yuan against the Hong Kong (and American) dollar has made it a more credible currency, and it is now accepted in parts of Hong Kong. Eventually, that will make firms such as Ms To’s redundant. But publicity stunts such as her arrest are like trying to catch the wind with a butterfly net.

Original report from The Economist

Posted in Asia, Business, China, currency, Economy, Hong kong, Investment, Law, News, People, Social, Women, World | 1 Comment »

China’s Foreign Reserves Become Political Weapon

Posted by Author on September 27, 2007


By Wu Hui-Lin, New Epoch Weekly Magazine (chinese), published by the epochtimes in English, on Sep 25, 2007-

According to a report in The Daily Telegraph on August 8, 2007, Xia Bin, finance chief at the Development Research Centre, commented that Beijing’s foreign reserves (US$1.33 trillion) should be used as a “bargaining chip” in talks with the United States, which is pressuring China to raise the value of yuan. Later, He Fan, an official at the Chinese Academy of Social Sciences, told China Daily, Beijing’s official English newspaper, that Beijing had the power to set off a collapse of the dollar if it chose to do so.

Impact on the Global Economic Structure

As much as Xia and He denied what was written in the Daily Telegraph and said the reporter “further processed” part of what they said into a threatening article, the possibility of Beijing underselling U.S. dollars from its foreign reserves to retaliate U.S. pressure to raise the value of the yuan has drawn great attention. President Bush, Secretary Henry Paulson of the U.S. Treasury, and the Central Bank of China all made statements regarding this issue.

If Beijing really undersells the majority of its dollar assets, what will happen to the United States and the global economy? Can the United States prevent it? What can the it do?

In an era of globalization, no country can escape the impact when a major economic system is disrupted. A great example would be the sub-prime mortgage loan crisis in the United States, which resulted in disasters in global stock markets. As for Beijing possibly disposing of a significant holding of its dollars to avenge the United States for forcing it to increase the value of the yuan, the U.S. government and intelligence are believed to have contingency plans in place.

China’s Irrationality Will Cause Global Disaster

In the past, those who supported lifting economic bans on China believed China would accept global business regulations as it gradually became part of the world economy, and hence the Chinese Communist Party (CCP) would behave in a way that is controllable.

If the CCP does undersell the majority of its dollar assets in its foreign reserves, it will result in global economic chaos. Although Secretary Paulson of the U.S. Treasury said China, being the second largest holder of U.S. treasury securities, possesses less than the daily trading volume of these securities, Paulson had to give this confidence talk as a political figure. What Paulson said is true. However, once the underselling starts, through the exaggeration of media reports, the international “hot money” will withdraw from U.S. dollar assets to other safe havens. The investors’ confidence in U.S. dollar assets, once devaluation starts, will result in chaos in the global financial markets, which will be worse than natural disasters. Natural disasters cause local damage and loss, whereas chaos in global financial markets will make everyone a victim.

Of course, if the U.S. dollar fell dramatically, China will be the biggest loser, since it still possesses an enormous amount of dollar assets. As much as Beijing wouldn’t want this to happen and may hesitate to start an economic war as such, the scary thing is, the CCP is a ticking bomb and its reaction is unpredictable. If one day the CCP was pushed into a dead end and became desperate, it is hard to say it wouldn’t initiate such a destructive act, and once it happened, everyone loses.

CCP Thug Nature— Kidnapping China’s Assets to Threaten the World

In July 2005, the People’s Liberation Army General Zhu Chenghu said Beijing might use nuclear weapons against the United States if it interferes with the issue of Taiwan. Regardless of whether or not Xia’s and He’s statements were Beijing’s meticulous plots, Beijing’s thug nature can be seen. Threatening the international community makes it obvious that the CCP will choose to drag everyone down once it can’t handle the rising prices of floating assets and the yuan, even at the cost of its enormous foreign reserves.

The foreign reserves do not belong to the central bank or the government- they belong to the people. The major source of foreign reserves comes from its trade surplus, which is a result of every citizen’s hard work. In other words, the Central Bank of China uses the domestic currency to buy foreign currencies in the foreign exchange markets and turn it into foreign reserves, which in reality is earned by the Chinese people. It looks like the Central Bank’s asset but in fact, the Bank just takes care of the foreign currencies for the people.

Since foreign reserves do not belong to the central bank or government, naturally the government has no right to use it arbitrarily, or it will cause irreversible damage. Central banks in democratic countries prioritize safety and liquidity instead of profiting when utilizing their foreign reserves.

There are three reasons: 1. The central banks don’t want to take risks to make profits and would rather make a fixed interest. 2. Central banks in developing countries often use foreign reserves as a means of rescue— once foreign investors lose confidence in the domestic currency or financial system, the central bank must use foreign reserves to buy back its domestic currency. 3. People in democratic countries have policies to supervise their currencies and will not allow its government and central bank to aggressively invest with foreign reserves or to invest in a black box.

The CCP apparently looks at China’s foreign reserves as its property and plans to undersell U.S. dollars as a political weapon at the cost of deflating its own foreign reserves.

Not only that, the CCP set up a state foreign exchange investment company that purchased US$300 billion in foreign reserves from the People’s Bank of China (China’s Central Bank). On June 22, 2007, with money borrowed from the Central Huijin Investment Company (largest investment company in China owned by the Ministry of Finance and the People’s Bank of China), the foreign exchange company bought 1.1 billion shares from the U.S. Blackstone Group at US$29.61 per share.

By August 20, 2007, each share of the Blackstone Group was worth US$23.39, this Chinese foreign exchange company lost US$628 million in less than two months.

The People’s Bank of China, instead of taking care of China’s foreign reserves, allowed US$628 million to evaporate from the Chinese people’s account in less than two months. The thug nature of the CCP’s dictatorship can be seen.

U.S. Dollar Shows Signs of Weakening

Facing Beijing’s threat to undersell U.S. dollars is itself a sign of the weakening U.S. dollar. When everyone in the world holds too much of a country’s currency, it can easily cause panic. U.S. dollars in Europe during the Cold War and British pounds during the era of “the sun never sets” had the same problem. How can the United States prevent this from happening?

The United States must let the world see how its economy is still strong and strengthen investors’ confidence to avoid panic. When it all comes crashing down, the United States will need to issue new currency. However, it will severely frustrate investors.

As to whether the U.S. will freeze Beijing’s assets in the United States, theoretically it can, but it will push the United States and China into a loop of revenge – like China now exposing disqualified imported goods when the world continues to publicize illegal products made in China.

Regardless of whether or not Beijing really undersells its foreign U.S dollar reserve and collapses the dollar, isn’t something trivial or groundless, considering a the heavy hitters in the U.S. and China that have spoken up on this issue.

The CCP’s irrational nature and unpredictable behavior have always pulled at the nerves of the international financial community and the CCP has turned into a ticking time bomb in the world’s economy.

Wu Hui-Lin is a researcher at the Chung Hua Institution for Economic Research

Original report from the Epochtimes

Posted in China, Commentary, currency, Economy, military, Opinion, Politics, Report, Social, Trade, USA, World | 1 Comment »

Behind Thai currency crisis, China’s heavy hand

Posted by Author on December 19, 2006


Philip Bowring

, International Herald Tribune, France, Dec. 19, 2006-

 

HONG KONG: Thailand has another currency crisis, which will spread unless addressed internationally. It is a mirror, albeit in miniature, of that of 1997. As in 1997, the attitude of the big countries in Asia is pressuring the smaller ones. Indeed, the Thais and others have as least as much reason to complain about China’s foreign-exchange policy as does the U.S. Treasury secretary, Henry Paulson. Smaller countries like Thailand, which want to have open markets, are being forced to reconsider.

This time Thailand has instituted controls to prevent a flood of money into rather than out of its currency, the baht. The mix of an open foreign-exchange market, attractive interest rates and sound economic fundamentals had caused the baht to rise by 20 percent against the dollar over the past three years, and 7 percent in the past three months alone.

After anguished cries from exporters, it has imposed a severe penalty — a 30 percent tax — on foreign flows into baht accounts held for less than one year. It may be an overreaction by a military-installed government feeling its way. It has pushed down the baht but put stock markets across the region into a nose-dive. But given that Finance Minister Pridyathorn Devakul had a reformist, market-oriented reputation when governor of Thailand’s central bank, the move should be seen as more than just a knee-jerk response.

Meanwhile, pressure is building for South Korea to impose restrictions to stem the rise in its currency, the won, which has gained 5 percent in three months and 30 percent in three years against the dollar. But the issue is not really the dollar. After all, the euro has appreciated as rapidly as the South Korean won without more than minor grumbles from European companies. The problem for Thailand and South Korea lies in the appreciation of their currencies against those of Asian neighbors, principally the Japanese yen and the Chinese yuan but also the Taiwan dollar and, to a lesser extent, the Malaysian ringgit.

The world is awash with dollars, with few places to go other than the euro and, hitherto, the minor currencies of Europe and Asia. China continues to permit only a snail’s pace appreciation, totaling just 5 percent over 16 months, and Japan’s reluctance to increase its almost zero interest rates merely encourages the so-called “carry trade,” whereby yen can be borrowed cheaply for investment in higher- yielding currencies. The yen has been fluctuating in a narrow range and has gained less than 2 percent against the dollar in three years, while the euro and the won have been zooming ahead.

Taiwan, another economy with a massive current account surplus, is also guilty of currency manipulation to keep its currency roughly in line with the yuan and yen through a mix of ultra-low interest rates, reserve accumulation and administrative measures.

In practice, the smaller economies may be overreacting to the dangers of currency volatility. After all, New Zealand has long lived with huge swings in its currency, as has Australia to a lesser degree. Nonetheless, the Thai actions are symptomatic of the lack of currency coordination in the Asia-Pacific region, despite numerous public-relations statements following regional meetings of central bank governors and finance ministers.

Even the Asian Development Bank, not known for criticizing its members in public, has noted the gap between rhetoric and reality on currency issues. A senior bank official, Masahiro Kawai, whose brief until recently was regional economic cooperation, was exasperated enough this month to call publicly for Asian economies to allow their currencies to appreciate in unison against a falling dollar.

Kawai warned against allowing sharp swings within the region. But that is just what has happened. The baht and won in particular, and Singapore, Indonesian and Philippines currencies to some extent, have risen steeply against the Japanese, Chinese and Taiwanese units, all of which have accumulated vastly excessive amounts of foreign exchange reserves.

South Korea competes with Japan and Taiwan. The Southeast Asian economies must compete with China for long-term investment capital. Instead, short-term financial flows are making them less attractive for manufacturing than China, which keeps its currency depressed to attract capital and bolster exports. Unfortunately these countries are all too much in thrall to China to say so publicly. They need to condemn China and Japan for their complete failure to show regional leadership on an issue that matters deeply to all their neighbors.

Posted in Asia, China, currency, Economy, News, Opinion, Politics, Trade, World | 1 Comment »

 
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