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The argument for a stronger RMB. [Copy link] 中文

Rank: 8Rank: 8

Post time 2010-3-26 05:25:03 |Display all floors

As China's current account shrinks and is likely to go negative, inflationary pressure rises.

China's current exchange rate mechanism, using a band width, is too rigid for the dynamics of today's world.

Let us take a step back and understand how China "manipulates" the RMB:USD exchange rate. China buys USD denominated bonds and T-Notes from US Treasury with RMB, in other words, China floods the currency market with RMB for USD. The fundamental of supply and demand kicks in: more RMB therefore a lower price, less USD therefore a higher price. In this sense, China is not manipulating anything, China is merely buying and selling where it thinks it sees a benefit.

There are two immediate effects from this course of action.

First, China is funding USofA's budget deficit, if and when China starts winding down its purchase program, US Treasury will need to raise the coupon rates, higher interest rate will help USofA choke off inflationary pressure in the pipeline. But higher interest rate will also dampen consumer sentiment further, something USofA should not want to see happen.

Second, China holds a lot of zero or near-zero coupon rate bonds and t-notes from USofA, if new badges of bonds come onto the market with higher coupon rates, the bond yield will drop precipitously. But as long as China does not sell those bonds and t-notes, it is an unrealized book loss. That can be handled internally.

Export from China is picking up, concurrently China is stock-piling strategic resources against a global price hike. This leads to the current scenario where China is spending more than it is earning. Resources such as crude oil or iron ore are priced in USD or a basket of currencies. A weak RMB means paying more for the resource, conversely a stronger RMB means paying less for the resource. Therefore a higher RMB:USD exchange rate will directly benefit China's current account.

The argument that a stronger RMB will make China's exports uncompetitive is misleading because China has momentum and China has economy of scale, more so if the manufacturers tap the internal markets. Chinese workers are getting higher wages and salaries, sometimes upward of 20% for factory workers, this will translate to increased buying power and thus an expanding internal market for the Chinese manufacturers.

I believe the People's Bank of China is on the right path.

In summary I argue that a well thought out strategy to relax the exchange rate band is in China's interest and the sooner the better.

Let the dice fly high

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Post time 2010-3-26 05:41:33 |Display all floors
As Tim Gaitner pointed out the other, the Renmibe is a Sovereignty issue!

China will not allow Washington to conduct its economy policy, and neither will The Fed permit the BOC to conduct their!

The exchange of the Yuan will be determined and set by Beijing alone; and to the benefit of China.

The Americans are getting the message; slow yes, but it is seeping through.

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Post time 2010-3-26 06:00:51 |Display all floors
That's not the issue.   The issue is US telling China what to do.     

The problem is when someone tell you when to eat, when sleep and when to S-h-i-t.

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Post time 2010-3-26 06:04:33 |Display all floors

Posts #2 and #3

What has this got to do with Washington?
Let the dice fly high

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Post time 2010-3-26 06:06:10 |Display all floors
Originally posted by antimatter at 2010-3-26 06:00
That's not the issue.   The issue is US telling China what to do.     

The problem is when someone tell you when to eat, when sleep and when to S-h-i-t.
.

Precisely Anti!

Common sense dictate that

defence
internal affairs
immigration
currency
airspace
cyberspace

are sovereignty and security issues of the state.

It is very insolent of American politicians try dictating Chinese policies.
They have, and will always fail.

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Post time 2010-3-26 06:08:32 |Display all floors
Originally posted by cestmoi at 2010-3-26 06:04
What has this got to do with Washington?
.

Absolutely none!
But haven't they been sticking their snortty noses into the Chinese RMB exchange rate?
Where have you been these last five years?

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Post time 2010-3-26 06:13:31 |Display all floors

The argument

for a strong or weak RMB is down to the Ministry of money and good sense.

They alone know exactly the state of health of the Chinese economy.
The strategy the country going forward will determine the range of the RMB be set.

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