Comments on Yukon Huang "Rationalising China’s exchange rate policy", 28/09/2015
While the author, Yukon Huang argues it is easier to make the Chinese currency a regional reserve currency than a global one, China is probably more interested in making the RMB a global one. A global currency does not mean the stability against a particular major currency. The British pound, the Japanese yen and the euro all have had much greater fluctuations against the US dollar and against each other. So the idea that China must have a stable exchange rate with the US dollar is unnecessary in China's endeavour for the RMB to become a major international currency. If China's authority or its monetary authority has had that idea, that is naïve and unnecessary too.
However, it is probably good to have a stable currency in terms of against a basket of the major international currencies, as opposed to a particular one, even though the US dollar is by far the one used by most countries as the world currency reserve.
I am confounded by the argument that for a currency to become a major international reserve currency its host country must run a trade deficit to do it. There must be more than one way and different ways to make to happen, as lone as there is a need for other countries to hold that currency as a reserve. For example, the host countries can run trade deficits, or purely exchange its currency for another major or a number of other major currencies, so its currency can be available to other countries which need them. The host country can then invest those other currencies internationally, such as buy US bonds and other securities. The host country can, of course also buy gold from other countries.
It seems people see the US has run trade deficits and the US dollar is a major international reserve currency and therefore mistakenly think any host country of an international currency must run trade deficits.
Showing posts with label exchange rate. Show all posts
Showing posts with label exchange rate. Show all posts
2015-09-11
Chinese yuan has appreciated quite a lot against major international currencies since 2008
Comments on Stephen Olson "Hypocrisy mars RMB devaluation debate", 11/09/2015
While I am not sure whether the Chinese yuan has appreciated by more than 30% against the US dollar since 2008 (I cannot produce that results using some data from the internet), it is a fact that it has appreciated. The issue is not just the appreciation against dollar, but also the appreciation of the US dollar against virtually all major currencies at the same time. The following table shows the appreciation of the US dollar since 11/09/2008.
US Dollar Appreciation of US dollar against major other currencies since 11/09/2008:
Table 1 Changes in US dollar against other major currencies, 11/09/2008 to 10/09/2015
While I am not sure whether the Chinese yuan has appreciated by more than 30% against the US dollar since 2008 (I cannot produce that results using some data from the internet), it is a fact that it has appreciated. The issue is not just the appreciation against dollar, but also the appreciation of the US dollar against virtually all major currencies at the same time. The following table shows the appreciation of the US dollar since 11/09/2008.
US Dollar Appreciation of US dollar against major other currencies since 11/09/2008:
Table 1 Changes in US dollar against other major currencies, 11/09/2008 to 10/09/2015
|
US Dollar
|
Appreciation of US dollar against major other currencies since 11/09/2008 |
| Euro | 1.243727314 |
| British Pound | 1.139751852 |
| Indian Rupee | 1.456126442 |
| Australian Dollar | 1.139451374 |
| Canadian Dollar | 1.227951612 |
| Singapore Dollar | 0.983935053 |
| Swiss Franc | 0.858302022 |
| Malaysian Ringgit | 1.254505586 |
| Japanese Yen | 1.129265962 |
| Chinese Yuan Renminbi | 0.932251339 |
The US dollar appreciated 24%, 14%, 13% against the euro, the British pound and the Japanese yen respectively from then to yesterday. On the other hand, it depreciated about 7% against the Chinese yuan.
2015-08-22
China needs to be mature in its exchange rate policy
Comments on Sourabh Gupta "China sheds its dollar shackles", 22/08/2015
A disappointing aspect in the Chinese monetary authority's recent actions was on the third day of its new exchange rate policy, that is, it intervened to prevent the Yuan from falling further and reversed the day's falling trend. While it may be understandable that action was to prevent too rapid depreciation of the Yuan and as a result to avoid currency wars, it was against the stated policy to let the market play a greater role.
From China's economic point of view, the depreciation of about 3% was too little and too late to rest its falling exports, given the real appreciation of the Yuan along with the rise of the US dollar against major currencies, particularly the Euro.
In a sense, it still reflected the timidity of the Chinese monetary authority and possibly the Chinese authority in terms of fearing being labelled as currency manipulator by the US, particularly the US Congress. It has been too coward and has not shown independent and confident leadership skills. That is a pity, to say the least, particularly in the context of the strong downward pressure for its economic growth. They need to be mature and to be seen as mature enough in their dealing with the US.
A disappointing aspect in the Chinese monetary authority's recent actions was on the third day of its new exchange rate policy, that is, it intervened to prevent the Yuan from falling further and reversed the day's falling trend. While it may be understandable that action was to prevent too rapid depreciation of the Yuan and as a result to avoid currency wars, it was against the stated policy to let the market play a greater role.
From China's economic point of view, the depreciation of about 3% was too little and too late to rest its falling exports, given the real appreciation of the Yuan along with the rise of the US dollar against major currencies, particularly the Euro.
In a sense, it still reflected the timidity of the Chinese monetary authority and possibly the Chinese authority in terms of fearing being labelled as currency manipulator by the US, particularly the US Congress. It has been too coward and has not shown independent and confident leadership skills. That is a pity, to say the least, particularly in the context of the strong downward pressure for its economic growth. They need to be mature and to be seen as mature enough in their dealing with the US.
2015-08-13
More transparent in Chinese exchange rate is in the right direction
Comments on Alice de Jonge "Fans of a more open China should welcome the devalued yuan", 13/08/2015
I believe that China will move further in the direction of letting the market play a greater role in determine its exchange rate, even though the PBC has strong power to intervene when it is necessary.
The announcement that the midpoint of the Chinese Yuan and the $US is the close point of the previous day makes the process more transparent in general and the operation closer to market forces in particular. These steps by the PBC is likely to further facilitate China’s desire and objective to internationalise its currency to commensurate with its economic status in the world.
It will be interesting to see how the PBC will determine the midpoint of its exchange rate when there is a clear conflict between the previous day’s close and any information point to a likely significant impact on the Chinese currency that has newly been available since the close.
If it is mechanically following the previous day’s close, people may trade according to the new information to profit from that. And that will likely force the PBC to consider some deviation from the previous day’s close. It may need to assess how much to deviate and in what directions, so the new midpoint is much more aligned with market forces.
PS: in response to comments on the potential impact on Australians and New Zealanders' properties by John Hill:
It is probably less likely for them to sell right now as compared to reduced demand/buyers due to relative movement between the Chinese Yuan and the Aussie dollar.The property bubble may not burst as a result, but its further inflation may be somewhat more checked.
I believe that China will move further in the direction of letting the market play a greater role in determine its exchange rate, even though the PBC has strong power to intervene when it is necessary.
The announcement that the midpoint of the Chinese Yuan and the $US is the close point of the previous day makes the process more transparent in general and the operation closer to market forces in particular. These steps by the PBC is likely to further facilitate China’s desire and objective to internationalise its currency to commensurate with its economic status in the world.
It will be interesting to see how the PBC will determine the midpoint of its exchange rate when there is a clear conflict between the previous day’s close and any information point to a likely significant impact on the Chinese currency that has newly been available since the close.
If it is mechanically following the previous day’s close, people may trade according to the new information to profit from that. And that will likely force the PBC to consider some deviation from the previous day’s close. It may need to assess how much to deviate and in what directions, so the new midpoint is much more aligned with market forces.
PS: in response to comments on the potential impact on Australians and New Zealanders' properties by John Hill:
It is probably less likely for them to sell right now as compared to reduced demand/buyers due to relative movement between the Chinese Yuan and the Aussie dollar.The property bubble may not burst as a result, but its further inflation may be somewhat more checked.
2015-08-12
'Dirty float' may be better than the markets
Comments on Vanessa Desloires "'Dirty float': how China manages its currency", 12/08/2015
While the use of "dirty float" puts a very negative sound to the managed float of a currency, the practice itself may not necessarily be dirty or worse than a free float or completely determined by market. This is because nowadays, speculations in the currency markets are so rampant that for most of the time a currency's market value does not reflect its value determine by economic fundamentals. In addition, there is the phenomenon of overshooting of exchange rate. Those two added together means very large, excessive and persistent deviations of a currency from the economic fundamentals of the home economy.
Economic policies aim at manage the economy so it is stable at full employment with low inflation.
Why shouldn’t the exchange rate be managed to make it stable and reflect the underlying economic fundamentals?
I think it should. Then it comes to the managed floating, the so called dirty floating.
Viewed from this perspective, the managed floating should be commended as opposed to being called dirty float, as long as it is at or close to the economic fundamentals.
Of course, to achieve the goal of being at or close to economic fundamentals requires a clear and transparent mechanism to operate the float and value a currency, so it is not used to gain trade advantages over others by under value the currency too much.
In summary, it may be better to have a relatively stable exchange rate regime based on a clearly defined and transparent framework for many countries if the so wish to do so.
The extreme thinking of market determined exchange rate is always better than the managed one is an illusion when the market does not work well enough to reflect economic fundamentals.
While the use of "dirty float" puts a very negative sound to the managed float of a currency, the practice itself may not necessarily be dirty or worse than a free float or completely determined by market. This is because nowadays, speculations in the currency markets are so rampant that for most of the time a currency's market value does not reflect its value determine by economic fundamentals. In addition, there is the phenomenon of overshooting of exchange rate. Those two added together means very large, excessive and persistent deviations of a currency from the economic fundamentals of the home economy.
Economic policies aim at manage the economy so it is stable at full employment with low inflation.
Why shouldn’t the exchange rate be managed to make it stable and reflect the underlying economic fundamentals?
I think it should. Then it comes to the managed floating, the so called dirty floating.
Viewed from this perspective, the managed floating should be commended as opposed to being called dirty float, as long as it is at or close to the economic fundamentals.
Of course, to achieve the goal of being at or close to economic fundamentals requires a clear and transparent mechanism to operate the float and value a currency, so it is not used to gain trade advantages over others by under value the currency too much.
In summary, it may be better to have a relatively stable exchange rate regime based on a clearly defined and transparent framework for many countries if the so wish to do so.
The extreme thinking of market determined exchange rate is always better than the managed one is an illusion when the market does not work well enough to reflect economic fundamentals.
2015-07-06
Need to have a proper perspective on exchange rate
Comments on Chu Nguyen "Vietnam needs to bring the dong down", 7/07/2015
If I understood you correctly, you are saying that the over-valuation of the Vietnamese dong is 1.002 in December 2014 as opposed to the benchmark of 1.000. That is only 0.2%, isn't it?
If you see how much a currency can change against another in a day, you would probably not say that the Vietnamese dong should be brought down, unless you have a different benchmark.
Further, are we sure that the measurement is so accurate that 0.2% is not within the margin of errors?
If I understood you correctly, you are saying that the over-valuation of the Vietnamese dong is 1.002 in December 2014 as opposed to the benchmark of 1.000. That is only 0.2%, isn't it?
If you see how much a currency can change against another in a day, you would probably not say that the Vietnamese dong should be brought down, unless you have a different benchmark.
Further, are we sure that the measurement is so accurate that 0.2% is not within the margin of errors?
2015-06-21
Pegging RMB to a basket of currencies
Comments on Heikki Oksanen "Should China peg the renminbi to a genuine basket?" 29 May 2015
Pegging the Ren Min Bi (RMB) with a basket of major currencies appears to be a sensible approach given China’s economic development and capital account regime.
Pegging the Ren Min Bi (RMB) with a basket of major currencies appears to be a sensible approach given China’s economic development and capital account regime.
While many economists may have very strong faith in the floating exchange regime, foreign exchange markets can and do exhibit excessive fluctuations showing bubbles similar to asset markets like stock and housing markets. Excessive fluctuations in foreign exchange markets may indicate some undesirability of complete floating.
Pegging to a basket of currencies increases stability and can reduce the degree of fluctuations.
2013-10-22
IMF regime needs rethinking and a redesign
Comments on Stephen Grenville "
There is a fundamental inconsistency in macro economic policies between the flexible exchange rate that can overshoot for a significant period of time and affect the real economy and import and export prices and the monetary policy for price stability.
This reflects a failure in mainstream economics and a gap in logic economic thinking.
Of course, the inability or the limited ability of most countries to defend the value of their currencies can be a factor.
But this should not be an excuse for failures in economic thinking to design a capable international or world monetary regime that can have both the benefits of currency flexibility and the stability of prices including for both tradable goods and services.
In the line of rogue US firepower
", 22/10/2013, http://www.businessspectator.com.au/article/2013/10/22/economy/line-rogue-us-firepowerThere is a fundamental inconsistency in macro economic policies between the flexible exchange rate that can overshoot for a significant period of time and affect the real economy and import and export prices and the monetary policy for price stability.
This reflects a failure in mainstream economics and a gap in logic economic thinking.
Of course, the inability or the limited ability of most countries to defend the value of their currencies can be a factor.
But this should not be an excuse for failures in economic thinking to design a capable international or world monetary regime that can have both the benefits of currency flexibility and the stability of prices including for both tradable goods and services.
2013-05-01
Reappraisal of exchange rate regimes
Comments on He Fan “China must push ahead with exchange rate
reforms”, 30/04/2013, http://www.eastasiaforum.org/2013/04/29/china-must-push-ahead-with-exchange-rate-reforms/
The real appreciation of the RMB is much more than the 30
per cent since the exchange rate reforms of 2005 as mentioned in the post,
given that inflation in China has been far greater than that in the US.
Having an annual limit on the total movement of the exchange
rate has merits, although the exact figure can be hard to determine and it is
not necessarily asymmetry between the upper and lower bounds. It should ideally
be linked to some measure of equilibrium level of exchange rate, based on
relative inflation rates and trade situations.
In that sense, the 7.5% limits appear to be arbitrary, as
the author seems to have acknowledged.
In terms of sequence of reforms, removing trade distortions,
such as export subsidies and imports restrictions should probably take a higher
priority than exchange rate reforms.
Further, it is not necessarily certain that free exchange
rate regime is better than a fixed exchange rate regime if the effects of
exchange rate bubbles on the real economy are taken into account.
The advantages of monetary policy freedom must be balanced
with the distortionary effects on resource allocation in the real economy and
potentially damaging adjustments.
So far, people take the easy way, that is, monetary policy
freedom, but leave the blames of real damage to the markets to avoid
accountability.
That is not necessarily optimal for the world economy or
indeed any individual economies.
In my view there is a need for a reappraisal of exchange
rate regimes with a new framework in which both the effects of both monetary
policy and the effects of exchange rate on the real economy are taken into
account, and consider whether there are any new policy design for the
international system to work better.
There should be a system that has a set of well-designed
rules to allow countries to choose a fixed or flexible exchange rate regime and
should a fixed regime is selected how the system will adjust under a set of
agreed rules.
Such a system can and should include provisions that will
allow monetary flexibility for every country supported by a set of agreed
international rules.
2012-07-30
Moral hazard must be avoided in euro
Comments on Karen Maley "First shots in the battle for Spain?" 30/07/2012, http://www.businessspectator.com.au/bs.nsf/Article/European-crisis-ECB-Mario-Draghi-Spain-bailout-pd20120730-WNUMH?OpenDocument&src=sph&src=rot
It will not work as long as there are diverse interests and responsibilities that have been running so deep and wide between the Germans and the others.
It will be irresponsible to bail out some the troubled euro economies without them paying a real price for their troubles.
A middle way is to bail them out on the condition that they pay a higher than the ECB rate or possible potential euro bond rates to other more better shaped euro member economies.
But no one is saying that yet so far.
Until that is clear, then the euro is doomed to see some of its weak members to exit it.
Alternatively, a possible dual euro currency system may also work that would afford the flexibility of currency adjustment to their fallen international competitiveness.
2012-01-13
International comparison of currencies
Comments on Daily chart "The Big Mac index", 13/01/2012, http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3?page=1
The big mac index is not a basket of goods and services and suffers a universal weakness in that it is a largely a service and is not an easily internationally traded goods or service, so wage and income levels have a mostly monotonic effect, that, is currencies in low income and wage countries appear to be more undervalued than high income/wage countries, apart from short term exchange rates moves.
If a highly traded goods or services would be less subject to this effect of non-trade services.
The point is price differences can be large for non-trade goods and services, and less so for traded goods and services.
The Economist should take this into account when making statements on currency valuations.
Of course, the advantage of big mac is that it is fairly comparable in quality that should not be overlooked.
PS: The Hong Kong case seems very strange.
The big mac index is not a basket of goods and services and suffers a universal weakness in that it is a largely a service and is not an easily internationally traded goods or service, so wage and income levels have a mostly monotonic effect, that, is currencies in low income and wage countries appear to be more undervalued than high income/wage countries, apart from short term exchange rates moves.
If a highly traded goods or services would be less subject to this effect of non-trade services.
The point is price differences can be large for non-trade goods and services, and less so for traded goods and services.
The Economist should take this into account when making statements on currency valuations.
Of course, the advantage of big mac is that it is fairly comparable in quality that should not be overlooked.
PS: The Hong Kong case seems very strange.
2011-12-03
A second best at best
Comments on Yin-Wong Cheung, Guonan Ma and Robert N. McCauley “Why is China attempting to internationalise the renminbi?” 2/12/2011, http://www.eastasiaforum.org/2011/12/02/why-does-china-attempt-to-internationalise-the-renminbi/
Leaving the real motivations of China's push for internationalisation of the RMB aside, there are alternatives to internationalisation of the RMB for avoiding or at least mitigating the potential huge losses for China associated with a rapid currency appreciation.
Beside considerations and argument based on the effects of RMB appreciation on both China's and indeed regional economies in terms of jobs and production of manufacturing, China could and should mount an argument to those parties that argue for a rapid appreciation that those countries must allow any assets China holds in any other currencies against which the RMB would appreciate to be denominated in dual currencies, that is, both their and China's currencies.
If any of them refuses to do that, it would be hypocrite of them by asking China to make a huge loss in terms of its assets holding in those other currencies.
If any of them refuses to do that, it would be hypocrite of them by asking China to make a huge loss in terms of its assets holding in those other currencies.
However, one may suspect that internationalisation of the RMB might have other more important effects as the Chinese economy becomes even larger and transaction costs of international trade and FDI become more significant.
How long would it take for the RMB to internationalise?
Comments on Gunter Dufey “The renminbi’s internationalisation: a reality check”, 29/11/2011, http://www.eastasiaforum.org/2011/11/29/the-renminbi-s-internationalisation-a-reality-check/#more-23060
I have no idea about the reality and more Importantly the prospect of the renminbi’s internationalisation, but one may be totally surprised or even shocked if the pace accelerates rapidly to an unprecedented speed.
Just as the rapid rise of the Chinese economy along with its international trade, it is entirely possible that the renminbi’s internationalisation may be even fast once China realise its benefits greatly outweigh its costs.
In theory, internationalise a currency should be easier than rapidly increase a country's share in international trade, given the fact currency similar to monetary adjustment can be instantaneous, while trade or the real economy would move rather slowly, as demonstrated by the famous exchange rate overshooting and the simple IS-LM curve macroeconomic framework.
Just as the rapid rise of the Chinese economy along with its international trade, it is entirely possible that the renminbi’s internationalisation may be even fast once China realise its benefits greatly outweigh its costs.
In theory, internationalise a currency should be easier than rapidly increase a country's share in international trade, given the fact currency similar to monetary adjustment can be instantaneous, while trade or the real economy would move rather slowly, as demonstrated by the famous exchange rate overshooting and the simple IS-LM curve macroeconomic framework.
2011-04-21
Time to rethink exchange rate regime
Comments on “Aust dollar clears 107 US cents”, see NEWS – Currencies, http://www.businessspectator.com.au/bs.nsf/Article/Australian-dollar-clears-107-US-cents-record-high-pd20110421-G4SRZ?OpenDocument&src=hp2
Two points: 1. the $A has entered uncharted territory and no one knows how high it will go in the next year or so. It may go as high as $US1.10, 1.20 or even 1.50, though few people would dare to say the last figure. The point is no one is sure about it.
2. Given the pervasive effects of the high $A, is there a case for some RBA intervention to keep it lower? Why does the RBA continue its conventional operations and stay away from intervention while the US Fed has been doing unconventional quantitative easing? Isn't time for the RBA to catch up with the changed international finance and monetary politics?
I think those are legitimate questions to ask and the RBA needs to have a serious review of what is best for Australia, getting out of its comfort zone of conventional thinking and conventional operating.
While free exchange rate has been the norm and dominate economic theory, excessive movements and fluctuations of a currency against others, especially the ones that are having a big effect on the country such as the $US for Australia given that many commodities are priced in $US, may not be optimal or desirable.
If the GFC has promoted a rethink of macroeconomic theories, a thorough review of international exchange rate regimes is also overdue and equally important.
Two points: 1. the $A has entered uncharted territory and no one knows how high it will go in the next year or so. It may go as high as $US1.10, 1.20 or even 1.50, though few people would dare to say the last figure. The point is no one is sure about it.
2. Given the pervasive effects of the high $A, is there a case for some RBA intervention to keep it lower? Why does the RBA continue its conventional operations and stay away from intervention while the US Fed has been doing unconventional quantitative easing? Isn't time for the RBA to catch up with the changed international finance and monetary politics?
I think those are legitimate questions to ask and the RBA needs to have a serious review of what is best for Australia, getting out of its comfort zone of conventional thinking and conventional operating.
While free exchange rate has been the norm and dominate economic theory, excessive movements and fluctuations of a currency against others, especially the ones that are having a big effect on the country such as the $US for Australia given that many commodities are priced in $US, may not be optimal or desirable.
If the GFC has promoted a rethink of macroeconomic theories, a thorough review of international exchange rate regimes is also overdue and equally important.
2011-04-15
Time to consider and reform international exchange rate regime
Comments on Max Corden “Global imbalances and the paradox of thrift”, 15/04/2011, http://www.eastasiaforum.org/2011/04/13/global-imbalances-and-the-paradox-of-thrift/
Yes, I'd agree that this is an excellent piece of analysis over the issues of international balance or imbalance.
On top of the views on the core balance issues, I'd add that the past history and various painful experiences have also shown a more difficult issue in terms of excessive volatilities of floating exchange rate regime.
Just consider the dramatic swings and changes in rate between the US and the euro over the short period since the creation of the euro.
How much the rate has changed, back and forth?
Is it compatible with the macroeconomic goal of price stability?
Or, have those changes in the relative price of imports versus exports really reflected the underlying relative economic conditions?
Were they conducive to businesses involved in external trade?
It seems that while free international exchange rates regime has its merits, it also has considerable downside. It is uncertain whether its advantages outweigh its disadvantages.
It may be time to study what an ideal international exchange rates regime should be, so to balance the positive and negative sides to maximise net benefits for all nations.
Yes, I'd agree that this is an excellent piece of analysis over the issues of international balance or imbalance.
On top of the views on the core balance issues, I'd add that the past history and various painful experiences have also shown a more difficult issue in terms of excessive volatilities of floating exchange rate regime.
Just consider the dramatic swings and changes in rate between the US and the euro over the short period since the creation of the euro.
How much the rate has changed, back and forth?
Is it compatible with the macroeconomic goal of price stability?
Or, have those changes in the relative price of imports versus exports really reflected the underlying relative economic conditions?
Were they conducive to businesses involved in external trade?
It seems that while free international exchange rates regime has its merits, it also has considerable downside. It is uncertain whether its advantages outweigh its disadvantages.
It may be time to study what an ideal international exchange rates regime should be, so to balance the positive and negative sides to maximise net benefits for all nations.
2011-03-04
What exchange rate regime will be better for both flexibility and stability?
Comments on Barry Carin "Prospects for France’s presidency of the G20", 4/03/2011, http://www.eastasiaforum.org/2011/03/04/prospects-for-france%e2%80%99s-presidency-of-the-g20/
It is interesting to note that the original French agenda includes exchange rate instability and commodity price volatility.
What does exchange rate instability mean?
And what does it mean for the US or some other countries push for floating exchange rate for China?
Wouldn’t that suggest that free floating can be as problematic as completely fixed exchange rate regime?
PS: While at the moment there is no universally accepted solutions to exchange rate instability and commodity price volatility, it does not mean that excessive volatility and instability are good for the world economy or businesses.
Economists and government officials and advisors must consider what regime will work better.
It is interesting to note that the original French agenda includes exchange rate instability and commodity price volatility.
What does exchange rate instability mean?
And what does it mean for the US or some other countries push for floating exchange rate for China?
Wouldn’t that suggest that free floating can be as problematic as completely fixed exchange rate regime?
PS: While at the moment there is no universally accepted solutions to exchange rate instability and commodity price volatility, it does not mean that excessive volatility and instability are good for the world economy or businesses.
Economists and government officials and advisors must consider what regime will work better.
2010-10-19
The US and currency war
Comments on Shiro Armstrong “Using the G20 to avoid currency war”, 18/10/2010, http://www.eastasiaforum.org/2010/10/18/using-the-g20-to-avoid-currency-war
For the US to justify its use of currency manipulation by China, the word manipulation must have a special meaning, given that China has largely pegged its currency to the $US and the rmb moved up and down with the $US as it moved up or down against other currencies in the past.
The argument by US politicians and some economists like Krugman that China steal US jobs especially in the wake of the GFC sounds very hollow, given that it was the US that was the epicentre of the GFC and together with the reduction in imports from those GFC severe countries that threatened the whole world.
The argument for a flexible exchange rate regime as adjusting to trade imbalance has both merits and fallacy.
It is not different from using deliberate depreciation to export one's own problems with the disguise of a market determination of exchange rate. That is no different from the "beggar thy neighbor" policy, albeit with the name of flexibility, or market mechanism.
But we all know markets can generate serious problems like bubbles. Who can say that trouble does not occur in the exchange rate markets?
The US has been in this situation for a while.
For the US to justify its use of currency manipulation by China, the word manipulation must have a special meaning, given that China has largely pegged its currency to the $US and the rmb moved up and down with the $US as it moved up or down against other currencies in the past.
The argument by US politicians and some economists like Krugman that China steal US jobs especially in the wake of the GFC sounds very hollow, given that it was the US that was the epicentre of the GFC and together with the reduction in imports from those GFC severe countries that threatened the whole world.
The argument for a flexible exchange rate regime as adjusting to trade imbalance has both merits and fallacy.
It is not different from using deliberate depreciation to export one's own problems with the disguise of a market determination of exchange rate. That is no different from the "beggar thy neighbor" policy, albeit with the name of flexibility, or market mechanism.
But we all know markets can generate serious problems like bubbles. Who can say that trouble does not occur in the exchange rate markets?
The US has been in this situation for a while.
2010-10-16
An alternative exchange regime
Comments on Ulrich Volz “A regional solution to global imbalances: We need a Beijing Accord”, 16/10/2010, http://www.eastasiaforum.org/2010/10/15/a-regional-solution-to-global-imbalances-we-need-a-beijing-accord/
While the dominant view on exchange rates in economic theories is the flexible regime, the regime has a fundamental weakness in terms of its inconsistency with the macroeconomic objective of price stability.
On the other hand, the fixed exchange rate regime in terms of one currency only like the $US has also its weakness when the $US is flexible with other main international currencies. It is moving with the $US against other currencies.
An alternative is to anchor a currency onto a basket of main international currencies. This will have some of the advantages of both the flexible and fixed exchange rate regimes. It is flexible with every of the main currencies that is anchored to and is fixed with the basket, that is the weighted currencies.
The best is with the the weights determined by a country's trade shares with those countries.
An alternative is to have an internationally recognised one, so that countries wish to anchor their currencies can do so. This international one should be based on a number of main trading nations, and its value against the main constituencies should be instantaneously be available just like a exchange market.
Another step in the alternative approach is to have a framework of adjustment mechanism if and when large international imbalances involving a country whose currency is anchored with those main currencies occur.
While the dominant view on exchange rates in economic theories is the flexible regime, the regime has a fundamental weakness in terms of its inconsistency with the macroeconomic objective of price stability.
On the other hand, the fixed exchange rate regime in terms of one currency only like the $US has also its weakness when the $US is flexible with other main international currencies. It is moving with the $US against other currencies.
An alternative is to anchor a currency onto a basket of main international currencies. This will have some of the advantages of both the flexible and fixed exchange rate regimes. It is flexible with every of the main currencies that is anchored to and is fixed with the basket, that is the weighted currencies.
The best is with the the weights determined by a country's trade shares with those countries.
An alternative is to have an internationally recognised one, so that countries wish to anchor their currencies can do so. This international one should be based on a number of main trading nations, and its value against the main constituencies should be instantaneously be available just like a exchange market.
Another step in the alternative approach is to have a framework of adjustment mechanism if and when large international imbalances involving a country whose currency is anchored with those main currencies occur.
2010-09-16
Rely on the market more and administrative measures less
Comment on Yiping Huang “Improving China’s art in dealing with external pressures”, 16/09/2010, http://www.eastasiaforum.org/2010/09/16/improving-chinas-art-in-dealing-with-external-pressures/comment-page-1/#comment-158342
While there is much more to be desired in the administration of the exchange rate in dealing with the so called international imbalance, the focus on the exchange rate, though having some merit, may have missed important points in the real issues of trade imbalance.
For example, it is often said trade subsidies like tax rebate for exports and import barriers, may be more important in terms of improving resources allocation and welfare.
Removing those market distorting factors and having a flexible and stable exchange rate linked to a basket of main currencies is likely to be a much better policy approach.
Further, it is beneficial to relax foreign currency management and allowing the Chinese and Chinese firms to hold and exchange foreign currencies inside China. That will also greatly reduce the superficial pressures for the yuan to appreciate.
Yes, all these mean to use the market more as opposed to administrative measures that are arbitrary and inefficient.
While there is much more to be desired in the administration of the exchange rate in dealing with the so called international imbalance, the focus on the exchange rate, though having some merit, may have missed important points in the real issues of trade imbalance.
For example, it is often said trade subsidies like tax rebate for exports and import barriers, may be more important in terms of improving resources allocation and welfare.
Removing those market distorting factors and having a flexible and stable exchange rate linked to a basket of main currencies is likely to be a much better policy approach.
Further, it is beneficial to relax foreign currency management and allowing the Chinese and Chinese firms to hold and exchange foreign currencies inside China. That will also greatly reduce the superficial pressures for the yuan to appreciate.
Yes, all these mean to use the market more as opposed to administrative measures that are arbitrary and inefficient.
2010-06-22
Mundell prefers fixed exchange rate for its stability
Bloomberg's Sophie Leung reports that "Robert Mundell, the Nobel Prize- winning economist, signaled that China’s pledge to return to a more flexible exchange-rate policy may erode stability in the global and Chinese economies."
See http://www.businessweek.com/news/2010-06-21/nobel-laureate-signals-yuan-move-to-erode-stability-update2-.html
Mundell appears to support fixed exchange rate for its stability over floating rate's swings.
The report says "Mundell, credited as the intellectual “father” of the euro, has previously called for the European currency to be fixed against the dollar, saying exchange-rate swings were a cause of the global financial crisis."
See http://www.businessweek.com/news/2010-06-21/nobel-laureate-signals-yuan-move-to-erode-stability-update2-.html
Mundell appears to support fixed exchange rate for its stability over floating rate's swings.
The report says "Mundell, credited as the intellectual “father” of the euro, has previously called for the European currency to be fixed against the dollar, saying exchange-rate swings were a cause of the global financial crisis."
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