Yuan, Forrest, Yuan!


The Chinese proved today that they are still Chinese. With no warning, no hints and total surprise they loosened the Yuan and are now letting it float against a basket of currencies, or in more precise terms: a managed float.

It's a small step and one I think is chiefly geared towards relieving some of the political pressure (i.e. protectionism) coming from other quarters. I'm very interested to know what some of the more financial minded have to say about today's events in the Middle Kingdom.


Sean Paul Kelley July 21, 2005 - 10:20am

What is the basket of currencies used in the float and what are the weightings?  Why all the secrecy?

Numerian July 21, 2005 - 10:24am

China Says It Will No Longer Peg Its Currency to the U.S. Dollar

By CHRIS BUCKLEY International Herald Tribune  11:45 AM ET

China bowed to months of pressure by revaluing the yuan by 2.1 percent and abandoning the currency's decade-old peg against the dollar.

http://www.nytimes.com/2005/07/21/business/worldbusiness/21cnd-china.html?hp&ex=1122004800&e
n=e12a13cb678ded22&ei=5094&partner=homepage

Audio: Analyst's View

http://www.nytimes.com/audiopages/2005/07/21/business/20050721_ROUBINI_AUDIOSS.html

Text of Announcement

http://www.nytimes.com/2005/07/21/business/21PBC-PEG.html

Timeline of Events

http://www.nytimes.com/reuters/business/business-economy-china-yuan-chronology.html

Dollar Falls Against Yen and Euro

http://www.nytimes.com/aponline/business/AP-Dollar.html

artappraiser July 21, 2005 - 11:02am

float will have more of a psychoogical effect than a fundamental one on trade as 2% is a small gesture and not much more.  

the real question is, is this the begining of a shift with more gradual widening to come?

i believe it is but that it will be slow over a considerable period of time.

nonetheless, i remain long gold bullion and newmont mining betting that the usd has peaked from the viscious usd bear market rally...

flambeee July 21, 2005 - 11:29am

Their need to buy US bonds diminishes. The US stock market is not going to like this?

Gandalf July 21, 2005 - 2:24pm

that prevents consecutive 30 basis point erosions from here?

mauberly July 21, 2005 - 4:32pm

Latin America Commodity Exporters to Benefit From China's Yuan(Update3)

July 21 (Bloomberg) -- Latin American commodities producers, including Brazilian iron ore maker Companhia Vale do Rio Doce and meat processor Grupo Bertin SA, producers, including Brazilian iron ore maker Companhia Vale do Rio Doce and meat processor Grupo Bertin SA, stand to benefit from China's decision to let the yuan gain, which makes their exports cheaper.

The region, home to the world's biggest soybean producers, meat exporters and coffee makers, will see increased demand for its commodities from China, industry executives said. China today said it will let the yuan fluctuate versus a basket of currencies, strengthening it by 2.1 percent to 8.11 per U.S. dollar immediately.

nymole July 23, 2005 - 9:47pm

July 25 (Bloomberg) -- China won't make its currency fully convertible for at least five years because it worries hedge funds may force the yuan to plunge, much as happened to the Korean won and Thai baht during the 1997 Asian financial crisis, said Li Deshui, a member of the central bank's monetary committee.

``There's more than $800 billion to $1 trillion of hedge funds in the world and the Chinese financial system is relatively weak,'' Li, 61, said in an interview. ``If the (yuan) becomes fully convertible it would be attacked by these hedge funds.''

...

``Over the next five years, I do not foresee the renminbi becoming fully convertible,'' Li said in Beijing on July 22. ``Our banks are not good enough and the monetary system is not quite up to international standards.''

China's banks are struggling to offload some 1.59 trillion yuan ($196 billion) in bad loans, a legacy of policy-directed lending to state-owned companies. They have also been ordered by regulators to raise their capital adequacy ratios to a minimum 8.0 percent by the end of 2006, when restrictions on foreign banks operating in China are lifted.

Last Defense

Bad loans as a percentage of total lending at China's banks fell to 10.15 percent at the end of June, the China Banking Regulatory Commission said on July 13. The bad-loan ratio at 208 financial institutions based in Hong Kong was 1.56 percent at the end of 2004, according to the Hong Kong Monetary Authority.

Economists and institutions including the International Monetary Fund have urged the world's third-largest trading nation to gradually make the yuan convertible on the so-called capital account, which would allow money to flow freely in and out of the country for investment purposes. The currency is already convertible on the current account for trade in goods.

The lack of full convertibility of the yuan is ``China's last economic and financial defense,'' Li said, adding that the government will ``not easily allow'' a change in the policy.

http://www.bloomberg.com/apps/news?pid=10000080&sid=aUtYpQOgtkrM&refer=asia

mauberly July 25, 2005 - 8:34am

July 26 (Bloomberg) -- The yen fell against the dollar and euro for a third day after China's central bank said it won't let the yuan strengthen in the ``foreseeable future'' following a revaluation of the currency on July 21.

``We had a big move after the announcement and now we're seeing it reverse,'' said Daragh Maher, a foreign-exchange strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. Chinese officials are ``saying they've done something and it was a bombshell and now let's just calm down.''

Against the dollar, the yen dropped to 112.33 at 10:27 a.m. in New York, from 111.49 late yesterday, according to electronic foreign-exchange dealing system EBS. The yen also fell to 135.04 per euro, from 134.46, and was lower against 14 of 16 most active currencies.

Japan's currency has given up three quarters of its 2.3 percent rise on July 21, the day China revalued the yuan to 8.11 from 8.3 per dollar and said it will manage the yuan versus a basket of currencies. Traders had speculated that China would further revalue this year, benefiting Japanese exports.

http://www.bloomberg.com/news/markets/currencies.html

``

mauberly July 26, 2005 - 9:51am

July 27 (Bloomberg) -- The yuan fell to the lowest versus the dollar since China revalued the currency on July 21 as the central bank seeks to damp speculation the change was the first of many.

The currency fell to 8.1128 per dollar, from 8.1099 yesterday, according to the daily fixing at the 3.30 p.m. close of trading on the Shanghai-based China Foreign Exchange Trading System. The drop is a decline of 0.04 percent, compared with the change of 0.3 percent allowed under new trading rules.

http://www.bloomberg.com/apps/news?pid=10000080&sid=aiKImQHwfrmY&refer=asia

mauberly July 27, 2005 - 8:02am

July 30, 2005

The People's Bank of China will issue some ''technical'' details of how the yuan's currency basket works because of demands from the market, governor Zhou Xiaochuan said.

He also said Friday China will introduce more currency derivatives.

Zhou said there are no plans for further revaluations to the value of the yuan and that fluctuations under the system started last week are not the result of government directives.

``The adjustment of 2 percent doesn't mean the change in the value is only initial and doesn't mean that there will be further adjustments,'' he said. ``From now on, the yuan rate's fluctuation will not be because of government adjustments.''

Zhou said that recent trading in the yuan after last week's revaluation showed the currency reflected supply and demand as well as moves in other currencies.

Last week the central bank revalued the yuan by 2.1 percent, setting its value at 8.11 against the US dollar and saying the exchange rate would be set with reference to a currency basket.

``The renminbi has begun normal floating, reflecting market supply and demand and changes in the exchange rates of major currencies in international markets,'' Zhou said.

http://www.thestandard.com.hk/stdn/std/China/GG30Ad01.html

mauberly July 30, 2005 - 5:38pm

Alan Wheatley

August 1, 2005

The more things change, the more they stay the same.

More than a week after China's landmark 2.1 percent revaluation, the yuan is still hugging tight bands around a US dollar peg, and US senators are warning afresh of trade trouble for Beijing unless it lets the currency rise further.

Although most economists are confident the yuan will edge higher, they said divisions within Beijing and the deliberately ambiguous nature of the new forex regime made it treacherous to predict the pace of change.

``What we are currently in is some sort of unknown halfway house between what we had before and a trade-weighted or a basket-management system. At the moment we have more questions than answers,'' said Robert Rennie, chief currency strategist at Westpac Bank in Sydney.

In an attempt for some clarity, the People's Bank called in some top economists the day after it replaced the yuan peg to the dollar with the following mouthful: a ``managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.''

One of those invited, Liang Hong of Goldman Sachs in Hong Kong, said she got the impression from assistant governor Yi Gang the central bank had been authorized to let the yuan move in a given range but that any rise in the first month would be very limited...

http://www.thestandard.com.hk/stdn/std/China/GH01Ad02.html

mauberly July 31, 2005 - 4:48pm

"For now, the bank said in a statement, the yuan will be allowed to move 0.3 percent up or down from the previous day's close, a price the central bank will set each day based on where the yuan was trading against one of a basket of currencies that will include the dollar."

"One of a basket"

A(one) basket?

One out of a number of baskets?

mauberly July 21, 2005 - 11:44am

If the announcement is correct and not something lost in translation, the unknown basket prevents trading of yuan.

Gandalf July 21, 2005 - 2:19pm

Comment by Stephen L Jen (London)

Thought 4.  The basket is much more important than the revaluation.  By adopting a basket reference framework, the determinants of USD/RMB are no longer the Chinese economic fundamentals, but other currencies in the basket.  Because this is a basket reference rate, USD/RMB can go either higher or lower, depending on the underlying anchor currencies.  (If EUR/USD sells off, it is possible USD/RMB trades higher than the original parity of 8.28!)  The basket is likely to be heavily dominated by the USD.  Using China's trade weights, normalized, a five currency basket would have the following weights:  USD (27%), JPY (31%), HKD (24%), EUR (15%), and GBP (4%).  The hard dollar pegs (USD and HKD) account for close to 50% of the basket.  If you consider the JPY as a soft USD peg, the weight on the dollar could be as high as 80%.  This means USD/RMB will still be very `docile', with the index being `sticky' relative to the USD.

http://www.morganstanley.com/GEFdata/digests/20050722-fri.html#anchor0

mauberly July 22, 2005 - 10:45am

as I said in the original post, It think much of this move is about relieving political pressure as opposed to fiscal pressure on the Chinese side. It will be a slow process, as it has been a long drawn out one already. Right now it is purely psychological--look at the swoon in the treasuries right now: is it Greenspan or Memorex?

Sean Paul Kelley July 21, 2005 - 11:54am

They don't tell the constituents of the basket(s).

If they really mean that there are multiple baskets, their constituents can't be easily calculated by outsiders. Because the outsiders do not know the number of the baskets and which basket is used which day.

Gandalf July 21, 2005 - 2:16pm

I think he too is guessing.

But upon closer reading of the PBOC's announcement, the yuan will be pegged to the closing price of "a" foreign currency, selected from a basket of currencies on a daily basis, notes Carl Weinberg, chief economist at High Frequency Economics.

http://www.thestreet.com/comment/nickgodt/10233942_2.html

Gandalf July 22, 2005 - 7:39am

This was about one basket and a chosen currency in it. How do they choose the currency is unclear.

Gandalf July 24, 2005 - 2:29pm

Thestreet.com suggests this is all for show before the up-coming China-U.S. summit, but that is only if you focus on the percentage revaluation.  I suspect most observers were expecting the exchange rate to the dollar would be revalued if anything were done at all, but abandoning the dollar peg (which China inherited from Hong Kong) is a major, major step and something of a slap in the face to the U.S.  It says that the yen and the euro are in the future going to be just as important to China as the dollar.  I think I read as well that Malaysia instantly abandoned its dollar peg as well to stay in sync with China (or was thinking about it, as was Singapore).  That also tells us that the Bellagio group had some advance notice of this, and that Asian countries are beginning to move in  orbit around China and Japan economically, and not just the U.S.

I have to think this is a major weakening long term of the role of the U.S. in the global economy.  It threatens the dollar as a reserve currency and probably hastens the day when OPEC takes a similar move for the pricing of oil.  I don't think this is what Snow had in mind when he was pressuring China to revalue.  

If China had gone to a freely floating currency you could derive the exact same conclusions, because it would show that there was now another major currency to challenge the dollar as a reserve haven.  China is a long way from being able to tolerate a free float, but this first step of changing to a basket peg shows the market China's long term intentions and the long term fate of the dollar.  

I think by pushing the yen, sterling, and euro up against the dollar the market read all this correctly.

Numerian July 21, 2005 - 9:31pm

Mark Lee, Vanson Soo, Alman Loong and Gladys Tang

July 22, 2005

China revalued the yuan by 2.1 percent against the US dollar and abandoned its more than decade-old peg of 8.28 to the dollar in favor of a managed float against a basket of currencies that could clear the way for a further appreciation in the months ahead.

The move was both less than its trading partners hoped for and more than many people expected. Critics of China's policy, mainly in the United States, had called for an immediate revaluation of at least 10 percent, though that was never on the cards since there was little they could do to force Beijing to take a step that would severely harm its export-dependent economy.

What few had expected, however, was the adoption of a system that could lead over time to a more fundamental change in the value of the yuan against most of the world's major currencies.

Unlike Hong Kong, which retained its peg to the US dollar but widened the band in which it's allowed to trade, the yuan will no longer have a fixed, public peg, though its daily movements will remain highly constricted - no more than plus or minus 0.03 percent a day.

Instead, its value will be tied to a basket of currencies - likely to remain secret - that will give the People's Bank of China greater flexibility to manage the currency's value but is likely to make it more responsive to normal market pressures.

``In the longer run, what they're doing is to allow the yuan to be pushed to whatever levels the markets [want],'' said Kent Yau, senior economist of Core Pacific-Yamaichi. ``The yuan is likely to overshoot on the strong side.''

Under the new system, the yuan immediately jumps to 8.11 to the dollar. But once off this starting block, it could, in theory anyway, rise (or fall) as much as 0.03 percent a day, since each day's closing price against a currency becomes the center of the next day's trading band. Each step is tiny, but over time they add up.

http://www.thestandard.com.hk/stdn/std/Front_Page/GG22Aa01.html

mauberly July 21, 2005 - 10:21pm

July 22 (Bloomberg) -- China's currency was fixed at 8.1111 against the dollar in the first trading day after the country yesterday let the yuan rise for the first time in a decade.

The People's Bank of China allowed the yuan to gain 2.1 percent, ending the peg of 8.3 introduced in 1995. Under the new regime, the central bank announces the closing price of the yuan, which then becomes the mid-rate for trading the following working day. The central bank allows daily movement of 0.3 percent either side of the rate.

``This is just the beginning of further moves, further appreciation'' in the yuan, said Craig Chan, an economist at Royal Bank of Scotland Group Plc in Hong Kong. ``Appreciation expectations will remain in place.''

The yuan closed at 8.1111 against the dollar at 3:30 p.m. local time from 8.110 yesterday, according to data on the State Administration of Foreign Exchange's Web site. The yuan was fixed at 1.048 against the Hong Kong dollar from 1.064 yesterday. The yuan was fixed at 0.073059 against the yen from 0.073455. The yuan closed at 10.0141 against the euro from 10.0671.

China initially limited to 0.2 percent the degree to which banks can quote the rates of the U.S. dollar against the yuan to clients above or below the rate set by the central bank each day, the country's currency regulator said on its Web site.

Banks can make spot quotes of the yuan against currencies other than the dollar to their clients within 0.8 percent of the non-dollar interbank rate, the State Administration of Foreign Exchange said.

http://www.bloomberg.com/apps/news?pid=10000080&sid=aT5z0Ie5MyWA&refer=asia

mauberly July 22, 2005 - 7:43am

China abruptly on Thursday evening allowed its currency, the yuan, to appreciate by a modest 2 percent, but said its exchange rate will not float by a big margin, aiming apparently to ward off speculative activities betting on the yuan's further jumps.

The overall aim of exchange rate reform is to build a managed, floating exchange rate mechanism based on market supply and demand and to maintain the yuan's basic stability at a reasonable equilibrium, the People's Bank of China (PBoC), or the central bank, said.

Big ups and downs of the exchange rate are not in line with the fundamental interests of China since such fluctuation will pose a fairly big threat against the country's economic and financial stability, it said.

"The circumstance (the yuan's big ups and downs) will definitely not happen," the bank told the press.

http://english.people.com.cn/200507/22/eng20050722_197576.html

mauberly July 22, 2005 - 7:59am

for this excellent analysis!

flambeee July 22, 2005 - 9:57am

Upside pressure of the currency pushes Chinese interest rate down, which they do not want at the moment due to overheating.

Gandalf July 24, 2005 - 2:32pm

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