Yuan gains stall against firm dollar
September 14, 2008
THE yuan yesterday completed a third weekly loss on speculation China will favor a moderate pace of appreciation as industrial production grew at the slowest pace in six years on weaker export demand.
Gains in the currency, Asia’s best performer this year, stalled as the United States dollar index, which tracks the greenback against those of six trading partners, advanced 10 percent this quarter. Production rose 12.8 percent in August from a year earlier, the statistics bureau said yesterday, after gaining 14.7 percent in July, Bloomberg News reported. [Read more]
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Timeline of China’s fiscal and monetary policy since 1995
August 25, 2008
As China’s Currency regulations gain more importance and directly affect quotations, Here are some facts about China’s fiscal and monetary policies from the present back to 1995.
– Tight monetary policy (current)
Earlier this year, facing pressure from surging inflation, a resurgence in fixed-asset investment and excessive lending and liquidity, China decided to shift its monetary policy from “prudent” to “tight”.
Tight policy has included raising commercial banks’ reserve-requirement ratios, allowing the currency — renminbi (also called the yuan) — to appreciate and controlling bank lending.
The latest move was in June, when the central bank — People’s Bank of China (PBOC) — raised the reserve ratio by 1 percentage point in all: 0.5 point effective June 15 and another 0.5 point effective June 25. The rise on June 25 was the sixth this year and brought the ratio to a record 17.5 percent.
The tight policy appears to have had an impact. The consumer price index eased to 6.3 percent in July from a near 12-year high of 8.7 percent in February.
Economic growth slowed to 10.4 percent in the first half of 2008 from 11.9 percent for all of 2007.
– “Prudent” fiscal and monetary policies (2005-2007)
China switched to a “prudent” policy at the beginning of 2005. During 2005, the country reduced issues of long-term National Construction Bonds to 80 billion yuan (11.7 billion U.S. dollars) from 110 billion yuan the previous year and cut the fiscal deficitby 19.8 billion yuan to 300 billion yuan.
In 2007, the PBOC raised the reserve ratio 10 times, from 9 percent in January to 14.5 percent as of December. The central bank had raised the ratio only five times over six years since 2000.
– “Proactive” fiscal policy and “prudent” monetary policy (1998-2004)
The proactive fiscal policy and prudent monetary policy were adopted in 1998 to counteract the negative impact of the 1997 Asian financial crisis.
China issued 910 billion yuan worth of national bonds over these years and invested the proceeds in infrastructure. The move boosted domestic demand, which had been weakened by the financial crisis, and contributed 1.5 to 2 percentage points of national output growth each year.
– “Appropriately tight” fiscal and monetary policies (1995-1997)
To rein in high inflation that started in 1993, China imposed appropriately tight fiscal and monetary policies. There was a surge in fixed-asset investment in the latter half of 1992, which was followed by major food price rises in 1993.
After the new policies were launched, the PBOC stepped up efforts to control money supply and finally reduced the consumer price index from 21.2 percent in January to 12.3 percent in August in 1995. The annual price increase was kept under 15 percent and gradually leveled out in the following years.
Source: Source: China Daily
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Yuan falls against U.S. dollar for 11 straight days
August 12, 2008
– China’s currency on Tuesday dropped against the strengthening U.S. dollar for the 11th consecutive day, the longest continuous fall since it was unpegged from the dollar in July 2005.
The central parity rate of the yuan, or Renminbi (RMB), was 6.8659 to the dollar, according to the China Foreign Exchange Trading System. The reference rate was down 21 basis points from the previous trading day. [Read more]
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Chinese currency set lower 5 days in a row
August 6, 2008
The central bank set the mid-point of the yuan’s exchange rate lower against the dollar for a fifth consecutive day Tuesday, stoking expectations for more fluctuations in the yuan’s exchange rate.
The yuan’s central parity rate stood at 6.8501 against the dollar Tuesday. Its traded peak came on July 17, when it was 6.8103 against the dollar.
Last week the yuan registered the largest weekly loss – 257 basis points – since the July 2005 exchange rate reform, which freed the yuan from a dollar peg and allowed it to float within managed bands.
Analysts said the yuan’s recent trend shows its previous rapid appreciation has failed to cater to policymakers, who have been fighting inflation but also want to ensure stable economic growth.
The yuan has appreciated by more than 6.6 percent so far this year while it appreciated by 6.9 percent against the dollar for the whole of last year.
While this has contributed to checking inflation, it has also driven many exporters to bankruptcy by increasing the prices of their products denominated in dollar.
“The faster yuan appreciation in the first half doesn’t seem to have gained any favors from the market and policymakers,” said Chen Xingdong, chief economist of BNP Paribas Peregrine Securities in Beijing.
Chen said the acceleration of the yuan’s revaluation has led to expectations of appreciation, influx of speculative capital and has hit the export sector. “It is detrimental to the economy.”
As a result, the central bank in its summary released after the second-quarter monetary policy committee meeting, has not mentioned – as it normally does – the use of market mechanism in deciding the value of the yuan. Analysts interpret the move as a sign of a policy shift.
“It indicates the central bank may no longer take yuan appreciation as a tool to fight inflation,” said Liu Dongliang, currency analyst with China Merchants Bank.
Policymakers may instead allow the yuan to rise with periodic falls to beat strong market expectations for appreciation, he said.
Liu held that the value of the yuan may continue to rise in the long term, but in the rest of this year, it will rise at most to 6.6 against the dollar. If the macroeconomic situation worsens, there would be substantial swings in the value of the yuan, according to him.
Chen from BNP Paribas Peregrine said the authorities should allow the yuan to fall to beat market expectations, although agreeing with the central bank’s view that the yuan’s value should be kept “basically stable”.
Source: China View
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An Economic Alarm (from Vietman)
July 22, 2008
Articele written by Lan Xinzhen,Beijing Review
Devaluation of currency, runaway inflation, huge outflow of speculative capital, decreasing resident purchasing power, a series of strikes against price hikes … Vietnam is confronted with an economic crisis.
Although the Vietnamese economic crisis has not yet caused any severe adverse reactions for other Asian economies, the international community, particularly emerging economies, is not relaxing its vigilance.
An alarm to China
In fact, the problems bothering Vietnam also exist in China in varying degrees, so the economic crisis in Vietnam arouses disquiet among economists over the economic development of China.
“If the Vietnamese economic crisis further expands, it is likely to spread to other countries, and China may be infected,” said Cao Honghui, head of Financial Market Research Office of the Institute of Finance and Banking of the Chinese Academy of Social Sciences (CASS). In his opinion, as with Vietnam, South Korea and Thailand are experiencing record inflation highs in the last seven and 10 years respectively, and inflation in Indonesia has also surpassed 10 percent. If these emerging economies are confronted with the same problems as Vietnam, it will be impossible for China to escape alone.
According to Cao, the most likely problem is that the hot money withdrawn from countries like Vietnam may flow to China, making it more difficult to strictly control excessive liquidity.
The People’s Bank of China, the country’s central bank, has launched a circular, requiring banks and other financial institutions to pay close attention to capital flows of foreign capital accounts and prevent an inflow of hot money.
A report released by China International Capital Corp. Ltd. says that among emerging Asian economies, China has the most stable economic situation and its foreign exchange reserve is the largest in the world. With improving fiscal conditions, it has ample fiscal revenue and the banking system is being perfected. However, once neighboring emerging markets are in turmoil because of inflation, the crisis may influence China in three aspects. [Read more]
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