China Economy Forum

[Keel]

Reminbi has forgone with the pegging only to USD a decade ago



China may continue managed floating exchange rate regime for next eight years: Central bank advisor
(Xinhua)
13:55, August 05, 2011

China may continue to institute a managed floating exchange rate regime that is tied to a basket of foreign currencies for the next eight or nine years, the China Securities Journal said Thursday.

The RMB is unlikely to be floated freely in the near term as the country's economy faces internal difficulties during its reform drive and external uncertainties of the global economy,the report quoted Xia Bin, a member of the monetary policy committee of the People's Bank of China (PBOC), or the central bank, as saying.

"To create a relatively stable exchange rate formation environment, the government has to gradually open its capital market, so the RMB can not go global too soon," Xia said in hislatest article.

But the regime will be more market-oriented in terms of floating range and frequency, and adopt relevant adjustments of currency weights in the basket, Xia said.

China moved to shift from a conventional dollar peg system to a managed floating exchange rate system in 2005, which means the central bank now does not link the yuan only to the U.S. dollar.

China's RMB "go global" drive requires totally free exchange of the yuan, which means the regulation of capital accounts should be fully opened, and that exchange rates will be largely determined by the demand and supply in both domestic and global markets. But thecountry can not handle this at its current stage of economic development, Xia said.

Xia suggested that the government should well coordinate policies concerning the exchange rate, capital management and reform while matching the reform of its exchange rate policy with that of capital management during the RMB's regionalization process.

According to Xia, establishing offshore RMB markets will not only help partially open the country's financial market but also reduce the impact of international financial crises.

Xia also noted that the government should control the scale and structure of offshore RMB markets in line with the development of its exchange rate and capital management polices.

China may continue managed floating exchange rate regime for next eight years: central bank advisor - People's Daily Online



So 2011 + 8 years = 2019 which is about the time that the above article by The Standard said about the "2020 deadline for Yuan's free float"

So when people said we can "replace" our FX Reserve for SWF, I have dropped my jaw to the floor!

On top of the above, this is probably the catalyst for the Americans' green light

US Approves Yuan SDR Inclusion after China Orders 300 Boeing Planes | Covert Geopolitics
September 27, 2015

 

[tranquilium]

That's weird.

Since America basically has veto power in the IMF (America + allies have majority voting rights). They could have vetoed it.

Instead they are supporting it?

What is the game here?

Well, I would personally wait the final result before celebrating, but the gist of the issue is that US is not stupid.

Neither US nor China just wake up one day and say "hey, this guy is my opponent, I am going to do everything to inconvenient him". The reason for the China-US tension and conflict is the countries competing for greater power and influence. The nature of China-US interaction is driven by professional, business-like competition instead of personal belief or feeling. Basically, China-US only antagonize each other when it is to the country's benefit. (This is in contrast to the conflicts between a lot of middle east nations and races, which is driving by other things like racial hatred, religious difference, etc. It is also different from the cold war ideology-driven conflict between US and USSR.)

This means while China and US can be at each other's throat in some instances and have plenty of dirty tricks to play on each other (let's face it, business competition can be very cut-throat), but when the cost of the conflict out-weight the benefit, the two countries are perfectly willing to sit down and talk it out. Hence why even though Americans recognize China as its greatest challenger, the two countries cooperate in a wide range of activities as well.

BTW, this is also why Vietnamese, Filipinos, Japanese, etc's belief that US will militarily intervene against China on their behalf is just plain silly. US will only military intervene against China if the benefit out-weight the cost and as long as China kept up its strength in both economy and military, that cost will keep out-weighting the benefit.

 

[Chinese-Dragon]

Well, I would personally wait the final result before celebrating, but the gist of the issue is that US is not stupid.

Totally agree. The biggest mistake would be to underestimate the USA, they are the most dangerous opponent.

What confuses me is that China was already heading in the direction of currency liberalization. So it can't be a tit-for-tat deal, currency liberalization for reserve currency status, since we were going to do that anyway (given enough time).

Making the Yuan a reserve currency, setting up institutions like the AIIB, these actions will end up diluting American power. So I don't understand why they are supporting the former (though visibly angry about the AIIB... as expected).

 

[tranquilium]

Totally agree. The biggest mistake would be to underestimate the USA, they are the most dangerous opponent.

What confuses me is that China was already heading in the direction of currency liberalization. So it can't be a tit-for-tat deal, currency liberalization for reserve currency status, since we were going to do that anyway (given enough time).

Making the Yuan a reserve currency, setting up institutions like the AIIB, these actions will end up diluting American power. So I don't understand why they are supporting the former (though visibly angry about the AIIB... as expected).

Think it like this way, China is going to setup AIIB no matter what US does. China's economic influence also means it will be a de facto reserve currency anyway. From US perspective, its influence is going to be diluted anyway, may as well just get what you can when some of the bargaining chips still have value.

I don't doubt China traded for the deal. For example, the Boeing purchase mentioned above is one potential example. It really goes like this:
US: Okay, China, let's talk RMB getting reserve currency status.
China: Already getting there by myself, thank you very much.
US: True, we can't stop you from getting reserve currency status, but if you are doing it without my support, it can take you years or even a decade to do it. And time is a valuable resource. So how about this, I help you speed up your effort to be the reserve currency, you sign these economic deals for me.
China: Looks good. Done.

This is what I mean by business like competition. When the two countries are in conflict because personal feelings, then the country may choose a lose-lose scenario just to spite the competition. On the other hand, if the competition is business-like, then you simply cut your losses and salvage what you can from the situation.

 

[Chinese-Dragon]

Think it like this way, China is going to setup AIIB no matter what US does. China's economic influence also means it will be a de facto reserve currency anyway. From US perspective, its influence is going to be diluted anyway, may as well just get what you can when some of the bargaining chips still have value.

I don't doubt China traded for the deal. For example, the Boeing purchase mentioned above is one potential example. It really goes like this:
US: Okay, China, let's talk RMB getting reserve currency status.
China: Already getting there by myself, thank you very much.
US: True, we can't stop you from getting reserve currency status, but if you are doing it without my support, it can take you years or even a decade to do it. And time is a valuable resource. So how about this, I help you speed up your effort to be the reserve currency, you sign these economic deals for me.
China: Looks good. Done.

This is what I mean by business like competition. When the two countries are in conflict because personal feelings, then the country may choose a lose-lose scenario just to spite the competition. On the other hand, if the competition is business-like, then you simply cut your losses and salvage what you can from the situation.

Your perspective does seem to be the most logical one.

Maybe they learned a lot from the AIIB episode. They furiously demanded that their allies not join, but it didn't work... and if anything, it made countries like the UK become even more friendly towards China.

I mean Xi Jinping had the entire British royal family (and the UK Prime Minister) all over him in the last few days. Britain wants us to build their nuclear reactors, their high speed rail, in addition to all the infrastructure we already built there (water/power).

America knows that if they repeat what they did with the AIIB, they will only stand to lose even more influence with their allies.

 

[Economic superpower]

Well, I would personally wait the final result before celebrating, but the gist of the issue is that US is not stupid.

Neither US nor China just wake up one day and say "hey, this guy is my opponent, I am going to do everything to inconvenient him". The reason for the China-US tension and conflict is the countries competing for greater power and influence. The nature of China-US interaction is driven by professional, business-like competition instead of personal belief or feeling. Basically, China-US only antagonize each other when it is to the country's benefit. (This is in contrast to the conflicts between a lot of middle east nations and races, which is driving by other things like racial hatred, religious difference, etc. It is also different from the cold war ideology-driven conflict between US and USSR.)

This means while China and US can be at each other's throat in some instances and have plenty of dirty tricks to play on each other (let's face it, business competition can be very cut-throat), but when the cost of the conflict out-weight the benefit, the two countries are perfectly willing to sit down and talk it out. Hence why even though Americans recognize China as its greatest challenger, the two countries cooperate in a wide range of activities as well.

BTW, this is also why Vietnamese, Filipinos, Japanese, etc's belief that US will militarily intervene against China on their behalf is just plain silly. US will only military intervene against China if the benefit out-weight the cost and as long as China kept up its strength in both economy and military, that cost will keep out-weighting the benefit.

Exactly.

Excellent points.

US-Russia:
US will never have a direct military confrontation with Russia because the cost of going to war with Russia far outweighs the benefits.

US will put economic sanctions on Russia because the benefits of economic sanctions on Russia outweighs the cost.

US-China:
US will never have a direct military confrontation OR put economic sanctions on China because the cost outweighs the benefits.

The stronger China gets and the narrower the advantage the US has over China, the greater the cost for the US of getting into a confrontation with China militarily or economically.

China need to continue to build up its nuclear arsenal (5,000+ warheads) and type, quality and number of delivery systems. China need to ensure mutually assured destruction scenario is established with the US like in the US-Russia military relationship.

China also need to boost domestic consumption so countries rely on the Chinese market for its growth, also be a large direct investor and portfolio investor so Chinese companies create jobs and wealth in countries around the world.

Also open up the Chinese financial system for foreigners so they can raise money in the Chinese financial system.

 

[tranquilium]

Also open up the Chinese financial system for foreigners so they can raise money in the Chinese financial system.

I would agree tentatively to partial opening. While open up the financial system does offer some advantages, we also learned from 97 and 08 crisis (as well as numerous other financial crisis around the global in the past) that every system needs checks and balances.

Financial system is a vital system to a nation's economic well being. We learned from 97 crisis that a nation's financial system can be attacked by a outside malicious (okay, more profit seeking than malevolent, but malicious nonetheless) force. We also learned from 08 crisis a nation's financial system can be broken by internal forces.

So, in my personal opinion, while partial opening of the Chinese financial system is inevitable (and indeed it is already partially opened), fully opening it may not be wise and the country (especially the central government, because it can be trusted to be less profit seeking than private corporate groups) needs to retain control over the core aspect of the nation's capital flow.

 

[yolo2016]

That's weird.

Since America basically has veto power in the IMF (America + allies have majority voting rights). They could have vetoed it.

Instead they are supporting it?

What is the game here?

You will find answers to your questions here

“This is going to make it very hard for the Chinese to undo a lot of these reforms,” said Lundsager, now a public-policy fellow at the Woodrow Wilson International Center for Scholars in Washington. “Once you move into this group of major currencies, it becomes pretty much impossible to backslide.”

To be sure, IMF staff said in a report in August that the yuan trails its global counterparts in major benchmarks, such as its use in official reserves, debt holdings and currency trading. Following the recommendation of staff, the board delayed by nine months, until the end of September 2016, the implementation of any change to the basket.

 

[Martian2]

Free-floating the Yuan is a double-edged sword

There are two possible outcomes from free-floating the Yuan.

1. Best-case scenario. A market-determined Yuan makes the Chinese economy more efficient.

2. Worst-case scenario. A market-determined strengthening Yuan prices many Chinese export industries out of the world market.

No one knows whether a free-floating Yuan will bring a net plus or a net negative to China. This is a replay of December 2001 when China entered the WTO.

Does China have the institutions and mechanisms in place to harness the market force of a free-floating Yuan? Or will China's economy start sputtering due to an overpriced Yuan? The hedge funds will push up the Chinese Yuan. Can China withstand the onslaught?

China is rolling the dice. China wants the benefit of a reserve currency. It lowers the transaction cost, because the Yuan will now become accepted as normal payment (which saves about 2% in costs for dollar transactions). On the other hand, if worldwide traders push the Yuan into the stratosphere (like the old German Mark) then China will experience a painful restructuring.

The good news is that a free-floating Yuan is five years away. China has time to get ready.

 

[tranquilium]

Free-floating the Yuan is a double-edged sword

There are two possible outcomes from free-floating the Yuan.

1. Best-case scenario. A market-determined Yuan makes the Chinese economy more efficient.

2. Worst-case scenario. A market-determined strengthening Yuan prices many Chinese export industries out of the world market.

No one knows whether a free-floating Yuan will bring a net plus or a net negative to China. This is a replay of December 2001 when China entered the WTO.

Does China have the institutions and mechanisms in place to harness the market force of a free-floating Yuan? Or will China's economy start sputtering due to an overpriced Yuan? The hedge funds will push up the Chinese Yuan. Can China withstand the onslaught?

China is rolling the dice. China wants the benefit of a reserve currency. It lowers the transaction cost, because the Yuan will now become accepted as normal payment (which saves about 2% in costs for dollar transactions). On the other hand, if worldwide traders push the Yuan into the stratosphere (like the old German Mark) then China will experience a painful restructuring.

The good news is that a free-floating Yuan is five years away. China has time to get ready.

That is true. I don't really like the dice-rolling concept, but then again what is life without some risks. I do, however, like a basketball analogy------if you are a 170cm, 60kg guy, you can try to get the rebound if you are fast and can jump high. Occasionally you will get the ball, but a lot more times you are just going to get knock aside. However, if you are a 200 cm tall 120kg center, you probably grab the rebound most of the time, often knocking aside the 170cm guy in the process.

Yes, there is risk and probably always be risk involved, but the risk can reduced greatly through the country's strength. For example, It may be easy push the currency of a $180 billion like Vietnam into the stratosphere, but if the same push is used against a $10 trillion economy like China, it will barely get off the ground.

 

[cirr]

Chinese company purchases Russian smartphone maker Yota Devices

By Liu Zheng (chinadaily.com.cn)

Updated: 2015-10-23 16:16

The Yota Phone 2, a double screen Android-based smartphone, is pictured in Helsinki January 29, 2015. [Photo/Agencies]

On Thursday, Hong Kong-based investment company REX Global Entertainment Holdings Ltd purchased 64.9 percent shares of Russian smartphone maker Yota Devices.

Vladislav Martynov, CEO of Yota Devices, said, "Yota Devices has been looking for investors for over a year. REX Global has been actively looking for an opportunity to enter the smartphone market. Yota provides the Hong Kong firm with the opportunity to do just that."

Under the terms of the agreement, REX Global will invest $50 million in Yota. The money will be used to provide capital for the product line and develop the next generation of YotaPhone.

According to a memo released to the press by Yota, the deal is likely to help the Russian company expand into China and Southeast Asia markets.

REX Global said it acquired the shares from Telconet Capital Limited Partnership. The remaining shares will be owned by the Russian state corporation Rostec (25.1 percent) and Yota management (10 percent).

Last November, Russian president Vladimir Putin presented the Russian-designed, Chinese-manufactured YotaPhone2 to President Xi Jinping as a symbol of cooperation in the field of consumer electronics between Russia and China.

On September 15, the company signed cooperation agreements with a Shenzhen ZTE Supply Chain Co Ltd (ZTESC), an associate company of Chinese tech giant ZTE Corporation, and Shenzhen X&F Technology Co Ltd, an ODM that focuses on terminal products in the field of communications.

"The next generation of Yota Phone will come with a high-end performance and a reasonable price," said Martynov. He told chinadaily.com.cn that features such as larger screen and better camera are some of the functions to be improved in the next generation.

He claimed that the price will be slightly cheaper than the existing YotaPhone 2, which is 4,888 yuan ($799).

REX Global Entertainment Holdings Ltd is an investment holding company listed on the main board of The Stock Exchange of Hong Kong Limited.

Chinese company purchases Russian smartphone maker Yota Devices - Business - Chinadaily.com.cn

 

[Keel]

I agree with @Martian2 and @zeronet here that free-floating Yuan is a double edged sword and I am more prone to seeing it negatively beyond 2020.

It is only about 5 years away that we have to make a complete overhaul in our financial system. Do we have enough time to cleanse up the glitches in the system?

If one knows the importance of SOEs to Chinese special economy, the opening up of the financial system is an invitation to foreign institutions in banking finance and insurance that they will not be restricted of full operations only in the Special Adm Regions in the likes of Shanghai. One immediate advantage that brings about with this relaxation is competitions will generate much improved services which will benefit the public at large but this also means the monopoly of SOEs in this segment of our economy is over! SOE is the mantle that the west wants to remove for a long time. This looks like another chapter of our auto industry in the making!

This news has an important ramification on the issue that we are talking about:

Top Chinese Bank Executives Quitting As Government Pay Cuts Hit Home
By Duncan Hewitt @dhewittChina on April 08 2015 4:23 AM EDT

• 

A general view of the Central Business District, including the Bank of China Tower (center L) and China Construction Bank (CCB) Tower are seen in Hong Kong, Dec. 26, 2014. Reuters/Tyrone Siu


SHANGHAI -- A Chinese newspaper has reported that several top executives at the country’s big state-owned banks have quit in recent months due to reductions in their salaries imposed as part of a government austerity campaign.

Time Weekly, a Guangzhou-based newspaper, said that pay cuts were behind the recent departures of senior executives from the Bank of China, Bank of Communications, and China Construction Bank, among others.

The Chinese government announced last summer that it was cutting the salaries of top executives at many state-owned companies, including banks, by up to 50 percent, as part of reforms aimed at eradicating waste and corruption in China’s official system. Those in the banking and the financial sector were among the first to be targeted. Time Weekly quoted sources as saying that since the beginning of this year, salaries for bank executives had been capped at 600,000 RMB (around $97,000).

The paper cited the case of Wai Kin Chim, chief credit officer of the Bank of China, who left his post late last month when his contract expired. Chim, a British citizen, was reportedly the highest paid executive at a Chinese bank. Time Weekly said his total compensation package, including incentives and benefits, was 8.5 million yuan ($1.4 million). Chim was reportedly technically exempt from the salary cuts, since he is a British citizen, but Bloomberg News last month cited bank sources as saying that cuts for others had made it hard for him to remain at the bank.

Other cases cited by Time Weekly included China Construction Bank Executive Vice President Zhu Hongbo, who stepped down in March, and Qian Wenhui, executive vice president of the Bank of Communications, among a number of others. The paper said Zhu, who joined China Everbright Group in March, was among several executives who had moved to private or joint stock banks.

The salary cuts are thought to be aimed at addressing public discontent at the privileges granted to top officials in the big ‘central’ enterprises which are still run by China’s Communist state. Officials in such enterprises often enjoy perks including the rank of minister or deputy minister -- yet are paid much more than other Chinese government employees of a similar status.

The cuts come as China’s President Xi Jinping is in the midst of a wide-ranging campaign against corruption, and is seeking to instill ideological purity in a system which many see as tainted by greed and self-interest. Even after a recent pay rise, Xi himself is now reported to earn just $22,000 per year.

Wang Hongzhang, the executive chairman of China Construction Bank, the country’s second biggest, said recently that the salary caps were a “correct decision” and a good way of achieving “fair pay” for senior officials. Wang said he had already taken a pay cut, believed to be around 50 percent of his previous $185,000 salary, according to the Financial Times.

But experts have pointed out that China’s banks, which are among the largest in the world by market capitalization, already paid salaries far lower than their international counterparts. Time Weekly noted a recent warning by Victor Wang of Credit Suisse in Hong Kong, who said the new pay restrictions would “make it hard for state-owned banks to retain high-quality talent.” The reforms come at a time when China’s state-owned banks face increasingly complex challenges, including deregulation of interest rates, and pressure to deal with growing levels of bad debt.

Time Weekly also quoted one former mid-level official at a state bank, who was now the CEO of an online business, as saying that “many officials will go to joint-stock or private banks, and quite a few to online financial platforms.” However, another official told the paper that the impact would be relatively short-lived, since state banks still offered opportunities for professional advancement in China.

One analyst quoted by Hong Kong's South China Morning Post recently suggested that the government might actually be seeking to encourage top executives to move to the country's private banks, in order to improve the quality of these institutions and boost moves towards greater marketization of China's financial sector. But other experts believe that the pay reforms may simply be a further reminder that China’s major financial institutions still find themselves caught between the often contradictory pressures of market forces and Communist Party orthodoxy.

Top Chinese Bank Executives Quitting As Government Pay Cuts Hit Home

 

[xunzi]

That's weird.

Since America basically has veto power in the IMF (America + allies have majority voting rights). They could have vetoed it.

Instead they are supporting it?

What is the game here?

They are afraid we are creating a new bloc to challenge IMF so that's why the US are soften their stance and want us more involve in the US's led IMF. Typical game.

 

[Godman]

yota phones

 

[Martian2]

China is currently paying a 2% transaction fee to use the US dollar for international business.

The immediate benefit of having the Chinese Yuan become an international reserve currency is that China saves 2% on its international business transactions. To use the American banking system, the cost is a 2% processing fee.

The upside is clear. China's margin for exports is pretty thin. Let's say Chinese exporters earn a razor thin 1% profit on their exports. By using the Chinese Yuan reserve currency, the transaction is routed through the Chinese banking system. China gets to keep the usual 2% processing fee. This means Chinese exporters can automatically increase their margin to 3%. That's huge.

The downside is giving up control over the Yuan. However, this risk can be tempered by enacting market-based reforms. As long as China adheres to market principles in five years, the Yuan should be relatively stable.
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https://www.usbank.com/pdf/Region2/CPI.pdf