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China’s currency is not really appreciating

by Brad Setser
March 25, 2008

Those aren’t my words.

They are the title of a chart — "the CNY is not really appreciating" — in Standard Chartered’s March 19 FX alert, an alert produced by Callum Henderson, David Mann and Stephen Green. Their point is simple: The RMB’s appreciation against the dollar, which unquestionably has picked up since November, has been offset by the dollar’s depreciation against a host of other currencies.

Between the end of 2007 and March 19 2008, the RMB was up 3.2% against the dollar. But the RMB was also down 3.2% against the euro and 9.4% against the yen. Subsequent currency moves haven’t changed the basic story all that much.

From the beginning of 2006, the RMB is up 12.2% against the dollar but down 16.0% against the euro. And Europe, not the US, is China’s largest export market — and the main source of Chinese export growth. The US was the world’s consumer of last resort through 2005. More recently, though, it has been Europe. The Standard Chartered team writes:

"Last year we calculate, the US only bought 22% of China’s goods — and only provided 13% of the increase in exports. Europe in contrast, bought 27% [of China's exports] and was responsible for 31% of the growth."

The Standard Chartered team now expects the RMB to appreciate by 15% v the dollar in 2008, making up for some of its past depreciation against the euro.

They concede that there forecast is ahead of the policy consensus in China. They expect, though, that the new Chinese economic policy team will be pulled in their direction by ongoing dollar weakness, low US rates, inflationary pressure and the risk of even larger hot money flows.

I personally would be surprised by a 15% move. Not because such a move doesn’t make economic sense. But rather because, as the Standard Chartered team notes, "the default mode in Beijing has been caution." Right now though a faster than expected pace of RMB appreciation against the dollar cannot be entirely ruled out. China presumably doesn’t want all of the necessary real appreciation of the RMB to come from higher inflation. $50b or so in monthly reserve growth likely has caught the authorities attention. As has the possibility that the US may not be through cutting rates.

Plus, Mr. Green has a record of getting some bold calls right. He was, I think, the first to suggest that China’s 2007 reserve growth might really approach $500b — and among the first to suggest that China’s 2007 current account surplus would be really big.

Incidentally, Stephen Green’s detailed analysis of the January and February increase in China’s reserves are both well worth reading. Too bad they aren’t available online.

51 Comments

  • Posted by S

    It looks increasingly likley that collectivism will extend to the currency markets with ECB & JCB interest rate cuts to set up the fed for a further funds cut without fully debasing the dollar (futures are pricing in such a move and money market rates in europe are choking up). This doesnt resolve the begger problem Europe is now afflicted with but it will not be a welcome development on the inflation export front. You can almost hear the hissing sound of air coming out.

  • Posted by Anonymous

    Brad,

    Your point is well taken that we should look at China’s multilateral exchange rate. You say though, that Europe and not the US is China’s largest export market. According to China’s Customs Statistics, China’s exports to the EU 15 in 2007 were $221 billion and China’s exports to the US were $233 billion. We in the U.S. are still number one at something.

  • Posted by chegewara

    i’m sorry, i don’t want to sound rude, but on march 19 cny ndf implied appreciation was 15%, so mr green was not making any “bold” calls that day.

    all these people that talk about appreciation don’t listen to what the press says locally and don’t have much sense about reality on the ground at all. reality is production is already being killed in guangzhou and other se coastal areas, and if you reval by immediate 10% or more you are just gonna make sure it does not come back. yuan is the new gold that everybody has to trade their dollars into instead of just staying cool and having cash for an opportunities that will arise from this dislocation.

  • Posted by moldbug

    15%! Wow, that’s a lot. That would really surprise me.

    But I hope it reminds the “no-decoupling” crowd what an effective buffer RMB appreciation is against a recession spreading from the US to China. To the extent that the economies of the US and China are coupled, they are coupled primarily by the flow of little green strips of paper from the former to the latter. Importantly, these green items do not circulate in China, but are converted by the latter’s benevolent authorities to little red strips of paper bearing pictures of Chairman Mao.

    That the RMB is appreciating tells us that the benevolent authorities feel that, if anything, the green strips are generating too many red strips. A US recession may reduce the flow of green strips. The benevolent authorities may actually find this desirable, in that it allows them to reduce or eliminate currency creep.

    But it is difficult to imagine the US’s own benevolent authorities tolerating a recession so brutal that a constant flow of red strips could not be obtained by stopping the creep, and holding the peg constant. Absent this possibility, China’s BAs would have to want a recession for a recession to happen. Since they certainly desire nothing of the sort, “contagion” strikes me as implausible – and I’m at a loss to understand why so many seem to believe in it.

  • Posted by bsetser

    Chegewara — relative to where most i-banks were 3ms ago, 15% is big. and i would bet that the change in Standard Chartered’s fx forecast started back when the 12m forward signaled an appreciation of more like 10%. This was a group effort — not one man’s call. and that usually takes time to coordinate. Moldbug’s reaction is I think indicative of those who don’t follow the NDF market.

    that said, you caught me. I usually check the 1y forward price regularly, but i was out of the office (meaning no bloomberg) and didn’t check last week. if you are right and the one year forward gapped out to an implied 15% appreciation, that is something i should have noted. that said, i would bet that most i-banks would recommend betting that the actual appreciation would be less (and thus selling protection v a bigger appreciation) at that rate, not being flat or buying protection and betting on a bigger than 15% appreciation.

    one last point — so long as China’s overall exports are increasing by $200b a year, I have trouble mustering up much sympathy for china’s beleaguered export sector. Over time, some export production will shift away from the coasts, whether inland or to other countries (hopefully ones with a higher propensity to consume). and over time Chinese manufacturing will need to be more oriented towards china’s domestic market. I don’t want to minimize the disruption this implies, but i don’t see how china’s trade surplus can continue to increase at a pace that adds 2-3% to China’s overall growth forever. And that means some changes — in China, and in the uS. Moreover, the underling positive BoP story only encourages the hot money flows.

  • Posted by bsetser

    anonymous — the EU now has more than 15 members …

    moreover, the EU data on imports from china (and the US data on imports form china) will be bigger than Chinese data on exports to europe, b/c of transhipment through hong kong. I have looked at both the US and EU data on imports and Standard chartered’s broad story checks out.

  • Posted by Michael Pettis

    Chegewara, too many people are seeing rising bankruptcies among smaller export companies in Guangdong and the rising RMB and making the same connection, but I have a problem with this argument and think there is another, better explanation. After all if a sharply rising RMB is really choking off exports and bankrupting exporters, we should see export growth signficiantly slow and we should see rising unemployment in places like Guangdong.

    We see neither. Instead what we see is employment growth in Guangdong is strong and wages are rising sharply.

    A better explanation then for the bankrupting of small Guangdong exporters is that the labor force in their province is making the necessary and welcome shift from low vaue-added assembly work and towards services and higher value-added work, and the shift occurs as a consequence of higher wages in the latter sectors.

    What really may be happening in Guangdong is that labor is shifting into more productive uses, cheap exports are shifting inland, and so local exporters are not able to compete. This is not a problem of the rising RMB. If a rising RMB begins to kill off exports, this should show up in the aggregate numbers, not as province-specific anecdotes.

    Brad, one of my worries is that the sharp decline in the dollar has softened the impact of the RMB’s appreciation. If things go into reverse and the dollar begins to regain some of its value (which, given the huge price differentials between Europe and the US, I think is very likely), we may suddenly see the RMB skyrocket in trade-weighted terms, after which China will begin the real shift out of exports into domestic demand. This is definitely good for China in the medium term, but could be very painful and even disruptive in the short term.

  • Posted by Nicolas

    China is flooding Europe with products even though the difference between the European consumer and U.S. consumer is night and day. China is doing enough if it it buying U.S. bonds. China is what the U.S. consumer made it particularly through the retail industry and electronics industry. However,China will not modify it’s stance on monetary policy because of a fundamental and logical disrespect of what the FED and U.S. administration are all about and what they have been doing. The world is not blind.

  • Posted by satish

    China has to accept appreciation either through nominal or by inflation. Given that they have chose the latter, we are seeing severe wage inflation. Today shanghai govt increased the minimum wage by 15%. That’s more money in consumers pockets. Reports suggests that oil shortage has spread to northern region. All due to increase in money supply to defend the dollar.

  • Posted by Anonymous

    “the EU now has more than 15 members”

    consisting of the EU 15 plus the rest

  • Posted by Anonymous

    http://en.wikipedia.org/wiki/EU-15

    along with the EU 3, the EU 3+3…

    not to be confused with the 15 EU member states that have adopted the euro http://en.wikipedia.org/wiki/Euro

  • Posted by Anonymous

    meanwhile, over in india:

    “….Tata Motors is just one of numerous Indian companies in sectors ranging from heavy industry, oil and chemicals to information technology, wind power and beverages that are taking advantage of a booming domestic market and a considerably stronger currency to flex their muscles abroad…. Indian companies view the rising rupee as a buying opportunity… “Winston Churchill must be turning over in his grave.”… “In a very short period of time, 10 or 15 years, they’ve set out to create global brands in what would traditionally take decades…” http://www.globeinvestor.com/servlet/story/RTGAM.20080325.r-tata26/GIStory/

  • Posted by Dave Chiang

    With the majority of its population in rural areas, China essentially remains a developing nation with a few modern industrial cities. The Chinese economy should not be compared with Europe or Japan. Already the yuan revaluation is impacting labor intensive employment across China. Fundamentally, the global economic imbalances are the fault of the guns and butter economic policies of the United States under the US Dollar hegemony regime. -DC

    Rising Chinese yuan forcing South Korean factory owners to flee China
    http://www.iht.com/bin/printfriendly.php?id=11339007

    QINGDAO, China: Scores of South Korean-owned factories are closing surreptitiously in eastern China as their owners flee rising costs, leaving behind embittered workers like Li Hua.

    Qingdao mirrors, on a smaller scale, what is happening in the Pearl River Delta near Hong Kong. There, thousands of factories, mostly run by Taiwan and Hong Kong companies, are moving inland or abroad or are simply closing as rising costs undermine the assumption that China is the world’s cheapest manufacturing location.

    “The wage rise, yuan appreciation and higher input prices are the main reasons,” he said by telephone.

  • Posted by bsetser

    Michael — to support your point, the RMB appreciated far faster on a broad basis in 2005 (around 10% on most indices) despite a small move v the $ than in 06 or 07. Why? Because the $ appreciated rather than depreciated. Your scenario is plausible, tho I would expect China to slow the pace of rmb appreciation v the $ somewhat if the $ started to really rise.

    That said, too quick an appreciation of the $ would undo some of the impact of $ weakness on the US trade balance. US non-oil trade deficit is coming down now (yeah) but the overall deficit remains far larger than what private investors want to finance, largely due to oil.

  • Posted by Guest

    Heads up … ECB Trichet was just on CNBC … his comments were all hawkish … standing firm …

    The ECB will not cut rates until pressures on price stabilty ease. Anyone who thinks otherwise has got it all wrong.

    In fact Trichet now sees pressures persisting throught the whole of this year -

    http://www.forbes.com/markets/feeds/afx/2008/03/26/afx4814957.html

    Trichet says inflation to remain significantly above 2 pct for most of 2008.

    Equities should go back on the chain gang today: Oil & gold up. Dollar down. Yen and Swiss Franc rising.

  • Posted by Anonymous

    “We expect a gradually rising trend in the gold price and if that happens we will get to a new high…” said [Blackrock] fund manager Evy Hambro, who… co-manages the $8.9-billion World Gold Fund…”
    http://uk.reuters.com/article/fundsNews/idUKNOA62770720080326?feedType=RSS&feedName=fundsNews

  • Posted by Dave Chiang

    Just wondering, can the Bank of China with $7.95 billion of AAA-rated subprime holdings apply for a Fed Reserve bailout? The Bernanke Fed is bailing out politically connected Wall Street investment banks Citicorp and Goldman Sachs, exchanging US Treasury bonds for defaulting subprime securities and derivatives. Soon the Ben Bernanke will be known as the largest Subprime Slum-lord of defaulting mortgage properties from coast to coast. In Bernanke’s own words, the Fed possesses the “modern technology of the electronic printing press” to monetize private sector bad debts.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aWFtCHL.1n54&refer=home
    Bank of China’s market value has dropped by $83 billion since it announced $7.95 billion of subprime-related holdings on Oct. 30, making it Asia’s biggest casualty of the U.S. mortgage market collapse.

  • Posted by Guest

    Are triple-A tranches that the Fed has lent against defaulting? I wouldn’t doubt it, but I have not yet heard anything of the sort, where did you get that information? I’d genuinely like to know…

  • Posted by Anonymous

    Jan ’04 – “…A workout of the bad debt could cost some $600 billion, experts say, which is 40% of China’s $1.4 trillion gross domestic product. The bailouts are no silver bullet. They won’t do anything to reduce bad loans per se, because the new money is in the form of U.S. dollar-denominated exchange reserves from the central bank, not Chinese currency. The reserves simply make the balance sheets appear stronger so the banks can write off more loans without shrinking their capital base. While the bailouts will bring capital adequacy ratios, currently 4% to 6%, closer to the international norm of 8%, tackling bad loans will require a new level of commitment from bank management. “The money is just one component of the overhaul,” says Ping Chew, S&P’s director of sovereign ratings in Singapore. “More important is management and how they manage their risks.”…” http://www.businessweek.com/magazine/content/04_04/b3867133_mz035.htm

    Feb.28.08 – “JPMorgan Chase Bank (China) Co Ltd has been appointed by the Ministry of Finance as a primary dealer in Chinese government bonds, making it the first U.S. bank to be allowed to underwrite domestic government debt. The China Banking Regulatory Commission had approved the appointment, which JPMorgan called a significant step as it expands its participation in China’s capital markets. Ministry of Finance officials had judged that the increasing maturity of the domestic market meant it was opportune to expand the circle of primary dealers to foreign banks experienced in underwriting sovereign bonds…” http://www.reuters.com/article/bankingFinancial/idUSPEK8310320080227

    “…As part of the original cross-investment deal, Bear Stearns agreed to assume $1 billion of Citic’s debts…” http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3492144.e

    “…Goldman Sachs has so far profited from the credit crunch, but is set to disclose a $3bn writedown in the declining value of the value of its stake in the Industrial & Commercial Bank of China.” http://www.guardian.co.uk/business/2008/mar/17/jpmorgan.useconomy1

  • Posted by Anonymous

    “…Bear’s broker-dealer capital and holding company capital “exceeded supervisory standards” by as much as two-fold during ["the crisis"]…” http://www.nypost.com/seven/03232008/business/bear_may_have_lived_103101.htm?dlbk

    “…Yet an effect of both deals… is the elimination of all outstanding credit default swaps on both Bear Stearns and Countrywide bonds. Entities who wrote the insurance — and would have been required to pay out if the companies defaulted — are the big winners. They can… pocket the premiums they earned on the insurance and live to play another day…” http://www.nytimes.com/2008/03/23/business/23gret.html?dlbk

  • Posted by Anonymous

    in other words, where are we with this bet:

    Nov. ’05 – “…International investors are vying to buy some of China’s $500 billion of bad loans, betting that they can profit by reorganizing the debt or selling underlying assets. The transaction is the first for AIG, a major overseas insurer in China, and the biggest for Deutsche Bank…” http://www.iht.com/articles/2005/11/30/bloomberg/sxloans.php

  • Posted by bsetser

    DC — the PBOC (the central bank) and the CIC (the largest equity owner) stand behind the BoC and other Chinese state banks. they don’t have access to the fed. they also don’t need access to the fed.

    note that this was a post on China’s currency, not broker-dealers. i am not quite sure how the various links above are relevant — there wasn’t a lot of context or explanation provided along with the link/ quote.

  • Posted by moldbug

    Indeed I don’t follow the NDF market, but if it is really indicating a 15% reval, my spidey sense says “free money.” Ie:

    i would bet that most i-banks would recommend betting that the actual appreciation would be less (and thus selling protection v a bigger appreciation) at that rate, not being flat or buying protection and betting on a bigger than 15% appreciation.

    Exactly. I suspect what’s going on is that capital controls have driven a lot of players who, in a world without capital controls, would be holding actual CNY, into the futures market.

    This is not unlike buying wheat futures as a “hedge against inflation.” What you think you’re doing is buying a store of value which is timeless and makes crunchy baguettes. What you’re actually doing is betting that wheat production would be lower than wheat consumption at the present price. Which may very well be the case, but – as recently noted chez MacroMan – I’d like to think these bets were based on some actual knowledge of wheat!

    Similarly, a 15% reval implies a level of wilful boat-rocking that is just inconsistent with anything I know about the PRC. In the Olympic year, with a recession in the US – forget it. Lever up and short the Chairman.

  • Posted by HZ

    DC,
    You misunderstood what “bailout” means. It is a loan to the banks with questionable collaterals so that they can access cash or more desirable collaterals (like the Treasuries). Banks are ultimately responsible for the losses on the collaterals, unless they go bankrupt. So unless BoC is facing a liquidity crisis, a “bailout” is not going to help. This is not the Chinese style recapitalization the state banks went through.

  • Posted by Dave Chiang

    HZ,

    As was reported, the Federal Reserve is directly responsible for upwards of $30 billion in financial losses from the JP Chase-Morgan takeover of Bear Sterns. In China’s earlier banking bailout, since their banks were fully state-owned, it cannot be represented as a taxpayer bailout of private capital. The sweetheart Fed deal with Citicorp to indefinitely exchange subprime defaulting debt with US Treasury bonds can be represented as a bailout of private capital. The $19 million salary to Robert Rubin is definitely worth every penny to Citicorp, not for prudent oversight of the bank’s balance sheet, but for his personal political connections that ultimately enables a federal taxpayer bailout of reckless and irresponsible subprime lending practices. Hillary Clinton is on record supporting Robert Rubin as the next US Treasury Secretary to bailout Goldman Sachs and Citicorp.

  • Posted by Guest

    “to indefinitely exchange subprime defaulting debt”

    Again, I understand that lower tranches are defaulting, but I have not yet heard the triple-A tranches that the Fed has agreed to “indefinitely exchange” are. I’d like to know the validity of this assertion. Where are you getting this information?

  • Posted by bsetser

    Moldbug — your analysis strikes me as right on. however, if you annualize the q1 appreciation v the $, you also get a big number, more than 15%. so to a degree the forward price (which i still need to download to confirm) reflects an expectation that the q1 trend can be forecast out for the full year.

  • Posted by Anonymous

    “…(CFTC) has approved new daily price limits… for corn, mini-sized corn, soybeans… futures and options on futures contracts… In addition, daily price limits for wheat, mini-sized wheat, corn… futures can expand twice, by approximately 50 percent each time, when market conditions dictate that an expansion is warranted…” http://www.mondovisione.com/index.cfm?section=news&action=detail&id=73476

  • Posted by Twofish

    DC: The sweetheart Fed deal with Citicorp to indefinitely exchange subprime defaulting debt with US Treasury bonds can be represented as a bailout of private capital.

    No it can’t. Citicorp exchanges mortgage securities for treasuries, but these are recourse loans, which means that if the mortgage securities go bad, Citicorp is still on the hook for the defaults, and it doesn’t help Citi’s balance sheet.

    The JPMorgan deal was different, in that it is a non-recourse loan in which if the Bear-Stearns collateral goes down in value, the Fed gets the loss. However, as part of the deal, it was essential to destroy Bear-Stearns and make the shareholders suffer, which is why the Fed demanded a $2 share price. The trouble with this share price was that it was too low since all of the other investment banks were ready to poach Bear-Stearn employees who had lost much of their life savings.

    DC: The $19 million salary to Robert Rubin is definitely worth every penny to Citicorp, not for prudent oversight of the bank’s balance sheet, but for his personal political connections that ultimately enables a federal taxpayer bailout of reckless and irresponsible subprime lending practices.

    $19 million is peanuts on Wall Street. If a CEO of a major IB is making only $19 million, they have done something very wrong.

    It’s less than the CEO’s of JPM and Goldman-Sachs are likely to make for actually doing their jobs well. Also, I doubt that Rubin has deeper political connections than any of the other heads of the IB’s, so when it comes time to figure out who benefits from the bailout it comes down to financial competence.

    JPMorgan got chosen as the bailout corporation because it didn’t get very much involved in subprimes.

    Having good political connections is part of the job description for any head of a major bank.

    DC: Hillary Clinton is on record supporting Robert Rubin as the next US Treasury Secretary to bailout Goldman Sachs and Citicorp.

    I think Rubin is a bit too old for the job. Also Treasury can’t print money or tax so it can’t do a big bailout.

    Wall Street is all about personal and political connections, since finance is all about personal and political connections. Finance is politics with numbers.

  • Posted by Twofish

    bsetser: the PBOC (the central bank) and the CIC (the largest equity owner) stand behind the BoC and other Chinese state banks. they don’t have access to the fed. they also don’t need access to the fed.

    I’m pretty sure that BoC can very easily get indirect access to the fed’s discount window through their depository banks.

    Also, articles from ’04 and ’05 are way of out date. The Chinese NPL problem of the 1990′s has been solved, and Western banks which thought they could make money reselling Chinese NPL’s have found out that they couldn’t.

  • Posted by bsetser

    2fish — i am not sure that the BoC could get access to the fed’s discount window. i don’t think the fed supervises the BoC’s US operations. But i really don’t know.

    I also checked and the expected appreciation in the forward market (over a year) is more like 11% now, and it peaked at around 13%. Standard Chartered is more aggressive than the market; they would buy NDFs at the current level and bet that the RMB will appreciate by 4% more than the market now expects. OK, that isn’t quite true since the one year forward is for a year from now, and they are betting on the end year rate — which would be closer to a 9m forward and an 11.2% appreciation (15% – the 3.8% already realized … ). no matter. it is an aggressive forecast.

  • Posted by moldbug

    Re Q1 appreciation: I wouldn’t be surprised if the PBoC itself is playing head games with speculators. Actually, I’d be surprised if it wasn’t. If you’re going to maintain a crawling peg and use capital controls, you pretty much have to.

    If this is true, there is an additional reason to short the Chairman: you are betting on the side of the house. And in this case, the house holds all the cards – it is trying to depress its currency, not prop it up.

    The PBoC has basically every possible motivation to front-load its 2008 appreciation. For another example: it has a strong incentive to get its crawling done now, so that it has all the ammo it needs if (or when) a US recession feeds through to export demand.

  • Posted by Dave Chiang

    Twofish,

    In my book, Robert Rubin’s salary of $19 million is excessive by any standard considering the almost $150 billion destruction in Citicorp shareholder equity and 40% slash in dividend payments in the past year. It is an open secret that Robert Rubin remains the real powerbroker at Citicorp. If pay were measured by performance, Robert Rubin deserves no more than a symbolic $1 salary. It’s really pathetic that Robert Rubin is still praised as a financial genius.

  • Posted by Guest

    Rachel Ziemba was just on CNBC, re SWFs. Good job.

    Let us know when you’re going to be on – to pound China’s FX policy.

  • Posted by Anonymous
  • Posted by Anonymous

    re: euro 15 – how much the eurozone currencies may affect the region’s ability to weather the euro’s extremes: “…The last time the pound fell below 12 kronor was in 1997… Yet while the krona is performing well against the… pound… “The krona is certainly weak against the euro…” ttp://www.thelocal.se/10722/20080326/

  • Posted by Anonymous

    if we may see a similar model for an asia zone currency, based on let’s say the rupee, with the yen, yuan, won perhaps the equivalent of britain, sweden and denmark, hk perhaps being switzerland, with the other asian currencies being the equivalent of new east europe/mediteranian members

  • Posted by Anonymous

    or as an option to the rupee, perhaps the rouble with russia straddling both asia’s and europe’s borders – otherwise, not sure where it fits…

  • Posted by Guest

    like the amero it’s not going to happen… free migration?

  • Posted by Twofish

    bsetser: 2fish — i am not sure that the BoC could get access to the fed’s discount window. i don’t think the fed supervises the BoC’s US operations. But i really don’t know.

    The Federal Reserve is the main supervisory agency for foreign banks and foreign banks can establish borrowing privileges at the discount window.

    http://www.newyorkfed.org/aboutthefed/fedpoint/fed26.html

    DC: In my book, Robert Rubin’s salary of $19 million is excessive by any standard considering the almost $150 billion destruction in Citicorp shareholder equity and 40% slash in dividend payments in the past year.

    CEO’s at investment banks get about 80% of their compensation in restricted stock so anything that hurts shareholders hurts top executives (which is why the fed insisted that JPMorgan buy Bear-Stearns really cheaply. The CEO of GS and JPMorgan both made about $40-50 million last year.

    DC: If pay were measured by performance, Robert Rubin deserves no more than a symbolic $1 salary.

    Trouble is that if you tie CEO benefits too close to stock price, then bad things happen. Also if you shrink CEO salaries too much, bad things will also happen.

    DC: It’s really pathetic that Robert Rubin is still praised as a financial genius.

    Sure. He was in charge of Treasury when the US was running budget surpluses and creating inflation indexed securities. There was a nice balance between Rubin and Reich.

  • Posted by bsetser

    2fish — is the BoC (USA) a subsidiary or a branch? I don’t think a branch would get access to the fed. I know that when Korean banks overseas branches needed cash in 97 they turned to the Bank of Korea, which deposited its fx reserves with them …

  • Posted by Stephen Green

    Thanks for highlighting our bold/not-so-bold CNY view. Apologies for joining late — am a big fan of Brad’s blog but don’t join in usually. This comment though made me reach for the keyboard…

    “i’m sorry, i don’t want to sound rude, but on march 19 cny ndf implied appreciation was 15%, so mr green was not making any “bold” calls that day.

    all these people that talk about appreciation don’t listen to what the press says locally and don’t have much sense about reality on the ground at all. reality is production is already being killed in guangzhou and other se coastal areas, and if you reval by immediate 10% or more you are just gonna make sure it does not come back. yuan is the new gold that everybody has to trade their dollars into instead of just staying cool and having cash for an opportunities that will arise from this dislocation.

    Written by chegewara on 2008-03-25 21:54:58″

    Well…First, where do you get your prices? On March 19th the 9m NDF was pricing in 6.4347, a 9% appreciation to (roughly) year-end. While the 12m (which takes us to March 2009) was priced at 6.3073, but that wasn’t 15% either; its a 11% move. Spot was 7.0721. So 15% over 2008 was considerably above what NDFs were trading at and have been trading in general. One might also note that have been a bad indicator of actual CNY moves generally; so its not a great reference point.

    Comments along the lines of ‘its obvious you don’t read the local press’/’dont know reality on the ground’ are just a little bit too silly to reply to directly. Michael P and Brad make the good, broader point about how exports overall are doing OK – and that restructuring is taking place. If we wanted Guangdong to export USD 1 T-shirts forever though we would have a problem.

    The other thing to point out is that China’s official trade data does not tell you about relative shares since a large amount of exports are re-shipped via HK. So you have to sit down and work out how much is re-shipped before you know how much up ends up in EU and US. Our numbers reflect that.

  • Posted by Twofish

    bsetser: 2fish — is the BoC (USA) a subsidiary or a branch? I don’t think a branch would get access to the fed. I know that when Korean banks overseas branches needed cash in 97 they turned to the Bank of Korea, which deposited its fx reserves with them

    BOC is a branch, but branches of foreign banks can get access to the discount window.

    (See eligibility to borrow)

    http://www.frbdiscountwindow.org/discountwindowbook.cfm

    I think the reason that Korean and Chinese banks might be hesitant to borrow from the Fed is that once you take money from Uncle Sam, you are going to have inspectors from the Federal Reserve pouring over the books of the parent company. (Which is also why stand alone investment banks might be skittish about getting money from the Fed.)

    Also, unlike the Korean and Chinese central banks, the Fed is unlikely to loan money to a foreign bank which is actually insolvent. The problem with the Chinese banks wasn’t a liquidity issue but a solvency issue, and I think the same was true for the Korean banks. If you need recapitalization then a loan from the Fed is not going to help you.

    The really interesting thing is to see how much power the Fed is amassing at the expense of the SEC. The big battle is Bernanke versus Cox, and Bernanke is winning this. The other interesting thing to watch is whether this will be the end of the independent investment bank. Also, it does seem interesting that the financial system of the US is starting to look a lot like the Chinese financial system with four really huge banks that are basically controlled by the central bank, which exercises its power by the fact that it can print money, whereas private shareholders can’t.

  • Posted by Guest

    If you look at the USD/CNY rate at a 5-year period (eg. http://finance.yahoo.com/currency/convert?from=USD&to=CNY&amt=1&t=5y), you can see that there are three periods from the begining of the appreciation. The first two of them lasted approximately for 1 year each, and now we are in the third period. In each period the appreciation is steeper than the previous one, and has a nearly constant slope. So, the Chinese caution can be seen, they are just getting bolder each year.

  • Posted by Guest
  • Posted by df

    the yuan is still depreciating relative to Euro and factories are already moving abroad. Once the olympics buildings are finished expect major trouble in CHina. And of course major troubles may happen DURING the olympics.

    those are great times. Rebalancing is finally happening.

  • Posted by Twofish

    df: Once the olympics buildings are finished expect major trouble in CHina.

    I do wonder why people are so fixated on the Olympics. The impact of the Olympics on economic growth and economic policy is basically negligible, and its impact on political decision making is small.

  • Posted by Judy Yeo

    Lots of dumb questions (hey, never claimed to be smart!)

    Agreeing with Moldbug – it has a strong incentive to get its crawling done now, so that it has all the ammo it needs if (or when) a US recession feeds through to export demand.
    Written by moldbug on 2008-03-26 14:58:29

    Could the split personality nature of the economy and markets (assuming that you could include HK alongside Shenzhen and Shanghai) mean that HK could act as a test case and steam valve of sorts for currency issues relating to the yuan? For instance, “redirecting” hot money flows and speculative pressures towards the bloated Hang Seng by allowing faster appreciation if not depegging of the HK $ . thereby enacting the boom-crash scenario in a more controlled environment and taking the pressure off the mainland. Ideas, Mr Stephen Green?

    Agreeing with Michael Pettis on the restructuring part, Guangzhou has long been seen as a manufacturing backyard for the export industries, it would be time for a shift to services, the problem is, have they been nable to institute the training and education required for that shift? It’s no longer a situation where a small educated elite could run a system dependent on untrained or poorly educated labour force; isn’t that what makes the shift from manufacturing to services so difficult? For some inexplicable reason, Shanghai is looking more and more like an asian version of the City in London, where banking is elite but so exclusive that it looks like a mirage.

    Agreeing with 2fish, the Olympic hype seems to have clouded lotsa people’s views, unless you’re in the hospitality, construction or tourism industries, or have bought into the property boom, the Olympic boom is likely to have been a blip on your radar. For those who see these events as justification for property speculation, too bad; by the way, the same “promo” line has been used in Shanghai, except the olympic theme was substituted by the world expo. (apologies to brad for the off topic comments here!)

  • Posted by Twofish

    Yeo: Agreeing with Michael Pettis on the restructuring part, Guangzhou has long been seen as a manufacturing backyard for the export industries, it would be time for a shift to services, the problem is, have they been nable to institute the training and education required for that shift?

    It’s been decades since anyone local in Guangzhou worked in the export factories, and most of the employment there comes from people in the interior. If the factories are moving from Guangzhou to the interior, then I think everyone ends up benefitting. It’s too late to start training and education, but Chinese parents have been drilling their kids to get a better education for the last twenty years, and the product of that effort is starting to come online.

    I should point out that globalization and the trend to high skill work, sharpens the different between people with skills and people who don’t, and this means that groups without access to education and global social networks can get very, very angry. This is the main reason for the Tibetan uprising I think.

    Also, I think that if the inflation is mostly in food, this means that farmers (most Chinese) end up benefiting and having farm incomes increase means that people are no longer as inclined to go from Hunan to Guangzhou.

  • Posted by Twofish

    In 2005, China basically said that it was no longer pegging to the USD, but was starting a new peg against a basket of currencies.

    Looks like this is exactly what they ended up doing. (Government officials doing what they said they would do. Yikes!!!! Alert the media!!!!)

  • Posted by Judy Yeo

    2fish
    Actually, probably wasn’t too clear in the last comment posted, not saying that the factories in Guangzhou are staffed by locals, the huge transport problems around public holidays particularly around Chinese new year point to the fact that “migrant” workers are aplenty, go to any major Chinese city and there are chances you’ll see itinerant workers in protest at some time. The question is, has the training and education reached critical mass or more appropriately critical proportion such that service industries are truly viable and which rung of the service industry ladder will that leap (from manufacturing) make? And which type of city is in question? First line, 2nd line, 3rd line? The differences are huge. As for the disappearance of hunan to guangzhou stereotype, the time to celebrate might well be when gansu and guizhou can see the same progress; “add oil”!

    frankly, not sure if the inflating prices will directly benefit farmers all that much, farmers in argentina, brazil and other major crop/agricultural production countries don’t seem too happy; when everything is angled at export, u may find an ironic situation where production countries run short of food, even in this modern world lucre wins over common sense.

    apologies to brad, this is off topic buthope u’re grinning and bearing with it!