Also 33% might only be 10% as the latest data shows, see Menzie Chinn here:

http://www.econbrowser.com/archives/2008/05/rmb_misalignmen.html

Once some equilibrium is reached, easy to spot for PBoC since it will have to buy much less USD, PBoC might want to release the tightness of the peg.

Your bet terms are substantially different than mine :).

the loss comes from an assumption that the RMB is undervalued v a euro/ $ basket by around 33%. That is just an estimate, but given that China has a current account surplus and that is has a capital account surplus, it isn’t unreasonable. Remember, China is buying all these $ to keep its exchange rate from appreciating. if its stops, it takes a loss. that is what gives me confidence; predicting the value of security whose long-term value is being held down by market intervention isn’t hard.

Moreover, over time, one would expect the RMB to appreciate in real terms, as normally happens when a country develops. Look at the yen from 1950 to 1980, or the won over time.

I am quite happy to take your bet … tho I would rather structure it as in twenty years, the PBoC will take a large write off on its $ holdings; a long-term view for a yank.

If you know the long term value of any security, you’re the richest man in the world! I envy you!

In the long term (actually not so long in my estimates), the peg will go away all by itself (crossing equilibrium) and CNY will fluctuate as most developped countries currencies.

If you look at EUR/USD it means that FX will vary +/- 50% around long term average.

Here is a prediction with very high probability of being true: at some point in the next 20 years, the write-off for PBoC USD reserves will be exactly zero, no accounting gain, no accounting loss.

You just have to be patient. I guess patience is not a virtue of USA based economists :).

i take the point that risk wise invading iraq was bigger, but in terms of $ cost, China is now spending more propping up the $ (or holding the RMB down) than the US is spending in iraq …

the whole point of my next post is that doing nothing implies a bigger problem, as the trend is more intervention not less (just as iraq is getting more not less costly over time)

Just the USA housing bubble is at least ten times bigger nominal wise and at least two order of magnitude bigger risk-wise.

Iraq war is also several time bigger nominal wise, and even more risk wise.

Derivatives loved by USA banks are waaayyy bigger.

Both USA problems and fixable locally by USA political action.

Political action should happen were the payoff is the biggest, and China FX/reserve issues are way down the list. Plus just doing nothing will solve the FX problem in a five year scale given current China FX policy, how long to fix the housing bubble aftermath if nothing is done?

the notion that the location of produciont of autoparts and furniture are not a function of the exchange rate strikes me as off. Auto assembly too. Look at German manufacturers new found desire to set up shop in the US. That has something to do with the euro-dollar. Chinese export growth to Europe in a host of products seems linked to the euro-renminbi. The notion that production shifts to China no matter what the exchange rate and thus the deficit is not shaped by the exchange rate doesn’t seem to fit the facts.

Eur-RMB move had an impact.
the recent $-RMB move seems to have contributed to the slowdown in US import gowth from china.
Menzie chinn found that the real exchange rate impacts US export growth.
Goldman found that the real exchange rate impacts Chinese export growth –

look at my next post. the acceleration in Chinese export growth is very correlated with the RMB’s depreciation.

there are a bunch of things the US should do; its current energy policy is no one’s fault but the US. but China’s policy of spending half a trillion in the fx market to fight RMB appreciation does have an impact on the world, not just China.

2fish — US rates don’t set the RMB/$; the US has lowered rates, creating pressure for appreciation. the market flows reflect that. but the pace of rmb appreciation and thus the value of the $ against the RMB is still set by China’s government. and yes, it is setting the exchange of the dollar v China as well as the china’s exchange rate with the dollar. Tis one price.

If RMB moves up USA companies that decided in the first place to go to China to screw their USA workers will just go somewhere else and it will not solve USA problems at all.

Only USA fixing its own problems (well identified by now) will change anything.

RMB appreciation won’t help auto parts makers or furniture makers. If you appreciate RMB, then the factories will relocate to Mexico. Textiles are unique since China has some comparative advantage there for reasons I don’t fully understand.

bsetser: The street isn’t really for appreciation in my judgment.

True, but they are for removing capital controls, and you just can’t remove capital controls without unpegging the currency.

bsetser: The street isn’t hurt by massive chinese demand for safe assets/ cheap Chinese goods.

It’s not but you don’t make much money selling treasury bonds. The way you make money in finance is M&A, high value consulting, etc. etc. All of which you can’t really do right now in China because of capital controls.

bsetser: i would have more sympathy for the argument that china should be able to determine its own exchange rate and its own pace of adjustment if: it wasn’t also setting the exchange rate for the US

Actually it’s not. The US is perfectly able to change the dollar exchange rate. Just either reduce the amount it borrows by cutting the deficit, or increase interest rates which will send the economy into a recession. The fact that the US government is unable and unwilling to make tough choices is hardly the fault of Beijing.

In fact there is a irony, in that during the 1990’s, the IMF and most economists argued that fixed exchange rates were a good thing *because* they forced governments to make tough choices. It’s very hard for anyone outside the US who has undergone an “austerity program” to have much sympathy for the United States.

In any case, China can only be expected to do what is in the Chinese national interest just as the US can only be expected to do what is in the US national interest. Discussions about what is “fair” or not seem to be rather irrelevant.

bsetser: b) its choices only impacted China not the rest of the world.

Everyone choices affect everyone else’s. It’s part of the globalized world that we live in. Rather than complain about how badly China choices affect people in the United States, I think one can start by asking the question of what the US *can* do if it doesn’t like the choices China is making. Once you start asking that question, I think it will become obvious that the options that the US has really are less appealing to large numbers of people in the US than the status quo. Let’s not forget that the current state of affairs in which we are all embedded in a global economic system in which everyone has to be somewhat nice to everyone else is one that people consciously put into place in the 1990’s.

I just can’t help but think of the proverb “be careful what you wish for since you might get it.”

Let’s think ahead. Suppose you get everything you wish for. RMB appreciates drastically. Trade deficit goes into balance. What happens next? (One obvious thing is that US companies become very cheap.)

a) it wasn’t also setting the exchange rate for the US
and
b) its choices only impacted China not the rest of the world.

the spillovers from the Gulf’s peg are less obvious; the gulf’s own residents are biggest losers — at least those who cannot borrow in rapidly depreciating dinar and riyal. But here the US role goes beyond not pushing for change. The US supposedly has encouraged the Gulf states to remain pegged — i.e. it is actively resisting change. and that strikes me as a policy error.

full disclosure: I am personally long gulf currencies as well as being intellectually long the idea that the Gulf shouldn’t be pegged to the $.