A few points worth reading when it comes to China and its currency. Via Voxeu.
As China becomes ever more important in the global economy, will its currency take on an international role? This column argues that in some sense, this is already happening – an increasing number of emerging-market currencies seem to track (co-move with) the renminbi – and the trend is set to continue.
The staggering economic rise of China in the last three decades leads to the question of the potential internationalisation of its currency, the renminbi (RMB). Internationalisation has different dimensions. An international currency is widely used in financial and trade transactions, and crucially it is used as a store of value. Some, like Eichengreen (2011) and Frankel (2011) see a potential global role for the RMB, provided important ancillary reforms to the domestic financial system and to the financial account first take place. In Eclipse, one of us projected that such a shift might happen in less than two decades (Subramanian 2011).
The rise of China surely ranks among the most important world developments of the last 100 years. With America still trapped in its fifth year of economic hardship, and the Chinese economy poised to surpass our own before the end of this decade, China looms very large on the horizon. We are living in the early years of what journalists once dubbed “The Pacific Century,” yet there are worrisome signs it may instead become known as “The Chinese Century.”
But does the Chinese giant have feet of clay? In a recently published book, Why Nations Fail, economists Daron Acemoglu and James A. Robinson characterize China’s ruling elites as “extractive”—parasitic and corrupt—and predict that Chinese economic growth will soon falter and decline, while America’s “inclusive” governing institutions have taken us from strength to strength. They argue that a country governed as a one-party state, without the free media or checks and balances of our own democratic system, cannot long prosper in the modern world. The glowing tributes this book has received from a vast array of America’s most prominent public intellectuals, including six Nobel laureates in economics, testifies to the widespread popularity of this optimistic message.
Yet do the facts about China and America really warrant this conclusion?
While the World is focused on the European mess, the Chinese are doing “their own thing”. From Bloomberg.
China widened the yuan’s trading band for the first time since 2007, a move that may be intended to stem criticism from trading partners after expectations for gains in the currency diminished.
The increase to 1 percent from 0.5 percent will take effect April 16, the People’s Bank of Chinasaid on its website today. The previous broadening of the trading band, which is centered on a rate set daily by the central bank, was from 0.3 percent in May 2007.
The shift comes days before the International Monetary Fund and Group of 20 hold talks inWashington, forums used by finance chiefs to lobby China to let the yuan gain. Expectations for a stronger currency dwindled in the past six months as Premier Wen Jiabao cut the country’s economic growth target, Europe’s sovereign-debt crisis hurt exports, and China’s trade deficit in February swelled to the biggest since at least 1989.
Political pressure may be a “main factor” in the move, said Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd., who added that this is a “political year” because of a looming U.S. presidential election.
Guest post by Azizonomics.
From South Africa’s City Press:
South Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.
Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.
This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.
The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.
Well — like the rest of Africa alongside all of its natural resources which (in spite of Kony 2012′s best efforts) becomes more Chinese by the day — it is clear where South Africa’s allegiance lies. Most interestingly, though, this is the first nation with an Anglo-American economic elite to come out against the present global order and more or less endorse China.
Readers are reminded of this chart:
Xia Bin, a researcher with China’s State Council’s Development Research Center and a former adviser to the nation’s central bank, talks about the outlook for the country’s economy and monetary policy. Mr Bin is assuring the world everything is fine, there is no property bubble, growth falling is apparently a “ridiculous” assumption and more. According to Xia Bin, a hard landing is impossible. At least we know one thing after listening to this interview, a hard landing is definitely possible, especially when the currency war starts boiling for real. Full video below.
So, Bernanke managed taking the US indices to new levels as banks apparently now have adequate capital levels. Vol collapsed further, while investors feel risk is diminishing. From a technical point, market looks to be breaking higher, but something disturbing might be happening in China. The Chinese market slumped the most in 3 months today, but maybe now we don’t need the Chinese, as the LTRO has saved Europe, and US doesn’t need any help?
There is though a big potential black swan about to happen in China. The currency has been strolling along the one way path for quite some time now. Vol on the Yuan has collapsed, and everybody is doing the “obvious” trade, as the yuan must go only one way. The question is, are we reaching a point, where China will need to reverse that order, and let the yuan devalue (despite the politicians talking of an equilibrium here) as other countries all are engaged in the currency war game. That could actually turn out to be very interesting, especially as people are all one way in the yuan option trade. Six months yuan vol is at 2.5% now. We traded at 6% in october…Is the reversal of the yuan the next black swan? From Bloomberg;
China’s stocks fell, sending the benchmark index down the most in more than three months, after Premier Wen Jiabao said home prices are still far from reasonable levels.
The Shanghai Composite Index (SHCOMP) slumped 2.6 percent at the close, reversing an earlier 0.8 percent gain. Wen, holding his last regular press conference at the end of the annual National People’s Congress, said a relaxation of curbs on the property market would lead to “chaos.” A gauge tracking property stocks sank 3.7 percent, led by Poly Real Estate Group Co., while Anhui Conch Cement Co. paced losses by building-material companies.