China’s leaders have warned their people they need to accommodate a “new normal” of economic growth far slower than the rate that propelled the economy into the world’s second-largest in the past two decades. As WSJ’s James T. Areddy and Lingling Wei report:
China’s leaders have warned their people they need to accommodate a “new normal” of economic growth far slower than the rate that propelled the economy into the world’s second-largest in the past two decades. As WSJ’s James T. Areddy and Lingling Wei report:
Now, the rest of the world also needs to get used to the new normal: a China in the midst of a tectonic shift in its giant economy that is rattling markets world-wide.
The slowdown deepening this year is part of a bumpy transition away from an era when smokestack industries, huge exports and massive infrastructure spending—underpinned by trillions in state-backed debt—powered China’s seemingly unstoppable rise. Today, debt has swelled to more than twice the size of the economy, and some of those industries, such as construction and steel, are reeling.
Instead of them, China is pushing services, consumer spending and private entrepreneurship as new drivers of growth that rely less on debt and more on the stock market for funding.
The price at which you can trade American dollars for foreign currencies may seem abstract, but events unfolding right now make it important to your future income, whether you have a job and the direction of the world economy in the next few years.
Around the globe, we are seeing strong downward pressure on prices, especially for commodities, prompting some governments to make their currency cheaper relative to the dollar. That suggests we may be entering a period of deflation, last experienced in a serious way in the U.S. in the Great Depression of the 1930s and the late 1800s. A deflationary spiral would represent a serious threat to the global economy.
Let’s look at the currency fight. To bolster its exports, and thus jobs, Beijing last week cut the price of the yuan, relative to the dollar, by about 4 percent.
More than a fifth of American trade is with China, so the relative price of the yuan and dollar matters a lot to both countries. A cheaper yuan helps China export more manufactured goods, because Americans (and others) can buy them at lower cost. This also means it will cost the Chinese more to buy American products, so fewer will be sold.
In June China sold $1 billion per day more to the U.S. than it purchased. If the yuan falls 10 percent it, will make Chinese goods so much cheaper that our trade deficit with China will likely increase by about $66 billion annually. That translates into a likely loss of 190,000 to 640,000 American jobs, according to the Economic Policy Institute.
Since 2000 the U.S. has lost more than 5 million manufacturing jobs, the majority of them to China.
The U.S. could stanch this by buying yuan for, say, 5 to the dollar. At that price currency traders would be hunting for every Chinese coin stuck between couch cushions.
Chinese leaders would not take well to this and would, in turn, come up with their own responses to mitigate the effect of such a currency war because their interest is fixed on China’s long march to becoming the next superpower.
But it’s not just China that is devaluing its currency so it can lower the price of exports. The South Korean won, Thai baht and Malaysian ringgit have all come down in recent days and the Vietnamese dong is sure to follow as these countries try to make their exports cheaper and protect their manufacturing jobs. The Australian dollar, which floats freely because it is not managed by the government, also fell in the markets.
All this makes the dollar relatively stronger, which reduces American exports and manufacturing jobs.
For the U.S. the stronger dollar will also put even more downward pressure on wages as manufacturers try to find ways to make products competitive and overcome the stronger dollar. That would in turn worsen the already weak spending capacity of most Americans, adding to deflationary pressures as sellers trim the prices of goods and services.
Another way to make the dollar cheaper is by lowering interest rates — except that they are already so low. The effective Federal Funds rate is a tiny fraction of one percent, 0.13 percent to be precise. The discount rate, what the Fed charges banks for overnight loans to smooth cash flows, has been at 0.75 percent since 2010, down from 5.75 percent in early 2001.
The Federal Reserve keeps hinting it will abandon its zero-interest-rate policy as early as this fall. But lifting interest rates will make the dollar even more attractive as a safe storehouse of cash. So higher interest mean an even stronger dollar as more money flows into American debt securities, which means fewer American exports and more lost jobs and that, in turn, means pressure on sellers to lower prices to avoid being stuck with unsold goods and services. It’s a vicious cycle we want to avoid.
Loss of purchasing power
Meanwhile commodity prices around the world have fallen, an indication of an economic slowdown or even the start of a contraction, as Japan just reported. This especially hits the Brazilian economy, the world’s seventh largest, since it relies heavily on exporting iron ore, petroleum and other commodities to China, for which it will be relatively less.
Oil may fall to under $20 a barrel from its July 2008 high of $146, according to Barron’s, the weekly magazine for individuals who trade stocks. Oil traded at about $48 last week. At $20, it would be a short-term disaster for oil-field towns, where the falling price has already resulted in fewer drilling rigs, shutting some operating wells and fewer support jobs.
The falls in prices around the world raise the specter of deflation. The underlying global problem is that while profits have soared and corporations hold vast hoards of cash, few workers worldwide are getting real pay raises and many have seen their incomes fall in real terms. Their lack of purchasing power has lowered aggregate demand.
My analysis of new IRS data shows that, adjusted for inflation, the bottom half of Americans reported average total incomes (excluding welfare benefits like food stamps) of just $14,775 in 2012, down 18 percent from 2003.
Most people’s income derives from work. When pay is stagnant the capacity of people to buy more goods and services also must be flat unless they go into debt. One way we have seen this in the U.S. is that the average age of cars on the road has increased from 8.4 years in 1995 to 11.4 years in 2014. We are slowly becoming less well off.
China faces similar problems. Angst among its newly created urban classes, who were sold on a bigger economic future through capitalism but feel the sting of rising prices and small wage increases, threatens party control.
Cheap foreign currencies convey some benefits. The American dollar is worth about $1.31 in Canada, making vacations and shopping there very attractive to those of us who live near the border. Airfares are even better deal. I was about to pay $1,452 in airfare to speak at the 2015 Global Investigative Journalism Conference in Norway when I looked up airfares out of Toronto. I paid just $695 and get to have dinner with a daughter who lives in Canada. Had I waited a month my airfare would have been just $515.
The danger of deflation
That price drop points to the problem with a general deflation, in which the overall prices of goods and services fall. People tend to delay purchases if they believe they can get a bargain in the future. Think about the $180, or 26 percent, I could have saved on airfare by waiting a few weeks and expand it to everything all of us buy.
The problem is that without constant spending, the economy collapses. Money circulates just like the blood in your body — when the heart stops so does everything else.
Economists generally argue that a broad deflation is a prospect far worse than inflation and much harder to solve. However one research paper argued that the deflation of the late 1800s — an era, like ours, of rapid technological change — did more long term good than damage, though for many the short-term economic pain was intense.
Americans since World War II have become accustomed to thinking that delaying purchases means paying more, because of inflation. But with deflation the opposite takes place: Because things will cost less tomorrow, next week or next month, people want to hold cash and postpone purchases. (For people on fixed incomes deflation would be great; they could buy more and more goods and services because of falling prices.)
We need adapt our thinking to the emerging economic conditions of the 21st Century, in which flat prices or even a deflation threatens our prosperity. Without the incentive of rising prices brought by inflation, we risk falling into a vicious cycle of economic decline by deferring the purchases that drive the economy and the investments in education, infrastructure and basic research and undergird it. That would be a tragic mistake.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera America’s editorial policy.
BUENOS AIRES, Sept. 24 (Xinhua) — If the Chinese renminbi (RMB) became an international reserve currency, it would facilitate trade and investment in Latin America, said Argentine expert Matias Carugati.
Carugati, head economist of a consultancy Management & Fit, told Xinhua in an interview that it would have “concrete, long-term benefits” if the RMB was a reserve currency because it could ease trade and investment with China.
In 2014, direct investment from China to Latin America totaled 98.9 billion U.S. dollars, according to the Chinese Ministry of Commerce.
Last Friday the People’s Bank of China authorized the Industrial and Commercial Bank of China to act as a clearing bank for RMB transactions in Argentina.
Carugati said this move made the RMB closer to a reserve currency.
“As more such agreements are signed with countries and regions around the world, the RMB will become more and more influential and the International Monetary Fund will accept it some day in its basket of reserve currencies,” he added.
BEIJING, Sept. 23 (Xinhua) — While the latest manufacturing activity data points to lingering weakness, economists have been quick to reassure the market that the Chinese economy remains on course to achieve its annual growth target.
On Wednesday, the Caixin flash China general manufacturing PMI, a preliminary gauge of factory activity, plunged to a 78-month low of 47.0 in September from 47.3 in August. A figure below 50 indicates contraction.
With exports, investment and manufacturing all gearing down, the heady days of breakneck, hectic expansion are a thing of the past. The economy posted 7-percent growth in the first half. While this is the slowest pace in nearly a quarter of a century, it is too early to say the economy is veering off course.
It is not all doom and gloom, however, as 7-percent growth is within the targeted range. Further, signs of mild recovery and the effect of reform measures will support the economy in the second half (H2) of 2015, many economists believe.
Certain economic indicators are showing signs of picking up. China’s value-added industrial output expanded 6.1 percent year on year in August, up slightly from 6 percent in July. The same month, total-power use rebounded from a drop of 1.3 percent in July to an increase of 1.9 percent year on year.
This gradual improvement in power use shows that the economy is still holding steady, said Shan Baoguo from the State Grid Energy Research Institute.
Although traditional manufacturing slowed down markedly, new industries such as robotics, electric vehicles and smart devices have seen rapid growth this year, said Niu Li, an economist with the State Information Center.
“The fundamentals for economic stability have not changed,” said Ning Jizhe, deputy head of the National Development and Reform Commission, the country’s top economic planner.
China has maintained a medium-high growth rate and its restructuring and upgrading drive continues to make progress, he commented.
To shore up growth, the government has reduced interest rates four times this year, cranked up fiscal spending, cut fees and taxes, and rolled out major projects to boost investment and consumption.
Red tape has been slashed for small businesses and innovators, and private and foreign investors are benefiting from expanded market access.
The effect of these measures will become more apparent in H2, helping the economy and, with the base effect taken into account, will ensure the annual GDP growth target, of around 7 percent, is achieved, Niu forecast.
Michael Menhart, chief economist of German reinsurance company Munich Re Group, has faith in China realizing its annual growth target, assuring observers that there is no reason to panic.
The country’s top brass have projected confidence, too. “The Chinese economy is under a downward pressure…China has the capacity and is in the position to maintain a medium-high growth in the years to come,” President Xi Jinping said in a written interview with the Wall Street Journal published on Tuesday.
Xi said, to understand China’s economy, one needs to take a longer view. “If you liken it to a large ship on the sea, the question you ask is whether it is sailing in the right direction, does it have sufficient engine power and energy to stay long.”
“Any ship, however large, may occasionally get unstable sailing on the high sea,” Xi said.
There remains huge growth potentials in China thanks to substantial domestic demand, and ongoing urbanization and industrialization, according to Wang Baoan, head of the National Bureau of Statistics.
Reforms in areas like government administration, market access and state-owned enterprises will help tap the economic potential, said Cai Fang, vice president of the Chinese Academy of Social Sciences.
“Whatever happens, China will stay strongly committed to deepening its reform on all fronts while opening still wider to the outside world,” Xi said.
With a plan to overhaul state-owned enterprises released earlier this month, and confirmation that more businesses will be allowed to accept foreign investment from 2018, China looks on course to navigate the choppy waters of structural transformation and economic growth.
INILAHCOM, Beijing – Tingkat paritas tengah nilai tukar mata uang China renminbi atau yuan, menguat 10 basis poin menjadi 6,3709 terhadap dolar AS, Senin (14/09/2015). Demikian menurut Sistem Perdagangan Valuta Asing China.
Di pasar spot valuta asing China, yuan diperbolehkan untuk naik atau turun sebesar dua persen dari tingkat paritas tengahnya setiap hari perdagangan. Bank sentral China, People’s Bank of China (PBoC), mereformasi sistem pembentukan nilai tukar pada 11 Agustus menjadi lebih mencerminkan perkembangan pasar dalam nilai tukar yuan China terhadap dolar AS.
Tingkat paritas tengah yuan terhadap dolar AS didasarkan pada rata-rata tertimbang dari harga yang ditawarkan oleh pelaku pasar sebelum pembukaan pasar setiap hari kerja dan juga mengacu pada tingkat penutupan pada hari sebelumnya, dalam hubungannya dengan kondisi penawaran dan permintaan serta pergerakan mata uang utama. [tar]
– See more at: http://pasarmodal.inilah.com/read/detail/2237308/yuan-china-menguat-10-poin-terhadap-dolar-as#sthash.CkBSK2Vi.dpuf
forbes: Out of the “currency wars” of the 1930s, and then World War II, came a shared dream among the non-communist states: to establish a stable economic environment for business and trade. Representatives from forty-four countries met at the MountWashington Hotel in Bretton Woods, New Hampshire, and recreated the world gold standard system.
The U.S. dollar was officially linked to gold at $35/ounce, its gold parity since 1934. Other currencies were linked to the dollar at fixed exchange rates, which effectively meant that they were linked to gold as well. The Japanese yen was 360/dollar, year after year. (360*35=12,600/oz.) The German mark was 4.20/dollar.
In June of this year, former Federal Reserve chairman Paul Volcker spoke at the annual meeting of the Bretton Woods Committee, and pined for the world in which he grew up and began his career.
Volcker was under-secretary of the Treasury for international monetary affairs from 1969 to 1974. The U.S. ended the Bretton Woods’ system’s official link to gold in 1971, and the system’s final dissolution was in the spring of 1973.
That would give you quite a perspective on the evolution of things since then. His conclusions?
“By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. …
That is all a long introduction to a plea – a plea for attention to the need for developing an international monetary and financial system worthy of our time.”
The rules of the “rules-based” Bretton Woods system were clear: the dollar was linked to gold at $35/oz., and other currencies were linked to the dollar, thus effectively linking them to gold as well.
If it’s that simple, and the results were good – the Bretton Woods era of the 1950s and 1960s was probably the most prosperous of the 20th century for the United States – then why not just recreate it?
Alas, the Bretton Woods system also had many problems – problems that were inherent in its creation.
The proper way to operate a gold standard system, and the proper way to institute fixed exchange rates with other currencies, is through what amounts to a currency board-type system. The daily operation of the system is automatic. There is no central bank policy board, interest rate policy, or anything of that sort. We have many currency boards in use today, and they work fine, as long as the proper operating principles are adhered to.
These currency board systems allow unimpeded foreign trade and capital flows, with no problems whatsoever.
But, that is not what the organizers at the Bretton Woods conference wanted. The idea of “central planning” of an economy was popular. The conference was held during wartime, when in fact even the U.S. economy was organized along lines not so much different than the Soviet system.
Rather, governments wanted to also be able to “manage” their economies through what amounts to funny-money manipulation – interest rate targets, monetary or credit growth targets, unemployment targets, trade balances, or other such things.
These two impossibly contradictory goals could only be sustained with heavy capital controls, and even then there were periodic currency devaluations. The British pound, once the world’s beacon of currency stability, was devalued in 1949 and 1967. The French franc was devalued twice in 1948, twice again in 1949, and again in 1957, 1958, 1960, and 1969.
The U.S. was playing the same game – trying to reconcile a “domestic monetary policy” of funny-money manipulation with an “external monetary policy” of fixed exchange rates — and, just as had been the case repeatedly in Britain and France, got to the point where it had to make a decision. Either the U.S. had to give up its funny-money ambitions, and return to the stable-currency discipline implied by the gold standard parity of $35/oz., or it would have to devalue.
Nixon devalued. At first, he wanted a devaluation like Britain or France, or the U.S. in 1933 – to re-establish the dollar’s gold parity at a lower value. In the Smithsonian Agreement of December 1971, only four months after the devaluation, the dollar’s new gold parity was supposed to be $38/oz. But, the Nixonites didn’t want to abide by the necessary gold-standard operating principles, at $35/oz., $38/oz., or at any gold parity. Fed chief Arthur Burns’ printing press was Nixon’s 1972 re-election strategy (it worked). In effect, the dollar had become a floating currency.
What a mess!
Thus, if we are going to meet again at a mountain resort hotel and build a new world monetary system (I suggest Davos), it would be good to review the failures – and successes – of the past.
First, the successes: the Bretton Woods gold standard system did indeed provide the monetary foundation for peace and prosperity throughout the world, for as long as it lasted. This was a bountiful time, for all levels of society.
Stable money works.
Second, the failures: the notion of combining a “domestic monetary policy” of funny-money manipulation with an “external monetary policy” of a gold parity or another fixed-value system was a total failure, even with the imposition of quite a lot of capital controls. This impossible contradiction led to the breakdown of the system in a brief 27 years, in the midst of peace and prosperity.
So, don’t do that.
Third, the construction of the Bretton Woods system, with its extreme reliance on U.S. dollar “reserve currency” assets instead of a direct link with gold bullion for currencies worldwide, was needlessly fragile. Although Britain and France devalued without any major repercussions beyond their borders, when the U.S. floated the “reserve currency,” the entire system blew up.
It would have been better for each country to have an independent link with gold bullion, and not be dependent on any “reserve currency.” This is much more robust, and has no particular difficulties.
Although I think most mainstream academics are still rather confused by the Bretton Woods era (as were economists who lived during that time), these basic problems are nevertheless well-recognized.
Lewis Lehrman was a member of the Congressional Gold Standard Commission of 1981, and co-author of the 1982 book A Case for Gold with co-commissioner Ron Paul. Although perhaps best known for his stint as the president of Rite Aid RAD +0.00% until 1977, he was also a managing director of Morgan Stanley during the 1980s.
More recently, he summed up his proposals in the 2012 book The True Gold Standard. The title continues: “A Monetary Reform Plan Without Official Reserve Currencies.”
The True Gold Standard actually contains a proposal for a U.S.-led international conference rather like the one at Bretton Woods. However, Lehrman’s proposal eliminates the excessive reliance on “reserve currency” assets such as U.S. dollar-based debt, and proposes a direct link to gold for participants, as was more often the case pre-1913 (although there were reserve-currency-based systems then too).
Lehrman’s proposal also includes a provision for “redeemability” of dollar base money into gold coin and bullion, and vice versa, on demand for all dollar users. This is a basic element of contemporary currency board systems, and also of historic gold standard systems.
The Bretton Woods system had it in the form of bullion redeemability for foreign central banks at the London gold market. However, gold bullion and coins had been made illegal for U.S. citizens to hold beginning in 1933, which continued to 1974. This was another major flaw in the Bretton Woods system, not only because it eliminated the basic operating mechanism of historic gold standard systems (redeemability), but because even the idea that the system was, fundamentally, a gold-based arrangement became little understood. This was a major political cause of its eventual breakdown.
With a focus on redeemability as a basic operating mechanism of the system, Lehrman’s proposal would avoid the basic contradiction that eventually blew up Bretton Woods: trying to combine both a Classical stable-money and Mercantilist funny-money approach in one ugly disaster.
We could have another Bretton Woods-like conference, followed by another two decades – better yet, two centuries – of peace and economic abundance.
But, we better understand what we’re going to talk about once we get there.
bloomberg: China’s management of the world’s second-largest economy hasn’t gone swimmingly of late, but authorities have succeeded in one vital though little-noticed mission. They’ve closed the gap between the market value of the yuan and its official daily value, known as the “fixing.”
Matching the fixing of the Chinese currency with its market rate is an essential step before the International Monetary Fund will consider making the yuan one of its reserve currencies, along with the U.S. dollar, the Japanese yen, the British pound, and the euro, said Marc Chandler, a senior vice president and head of currency for Brown Brothers Harriman in New York. Raising the yuan’s profile remains a priority for the Chinese government, even during the current market turmoil. In its bid to become a world financial power, Beijing is playing a long game.
This chart shows that late in 2014 a gap began to open between the market rate of the yuan and the fixing, which is announced daily by a branch of the People’s Bank of China, the nation’s central bank. That worried Chinese authorities, because according to IMF rules the price set in the fixing is supposed to be the one at which market transactions can and do occur. It wasn’t.
In the chart, the upper line is the market rate for the yuan; it’s expressed in yuan per dollar, so the higher the line, the weaker the yuan. The lower line is the daily fixing.
The chart shows that the yuan was weaker than the fixing—that is, weaker than the Chinese government wanted it to be. The gap was never big, always inside the plus or minus 2 percent band within which the government allowed the yuan to fluctuate daily.
Then came Aug. 11, when China abruptly changed the fixing, weakening the yuan by about 1.8 percent. The move seems to have been more an acknowledgment of the yen’s weakness in the market than a bid to increase China’s competitiveness. But currency traders, guessing that Beijing would weaken the yuan more to stimulate exports, pushed the rate even lower.
Chinese authorities didn’t try to hold the line with the fixing. Instead, they let the official rate follow the market rate precisely. If they had fought the market by setting a stronger fixing, they surely would have lost, and damaged the nation’s bid to make the yuan a reserve currency.
That may not look like a big deal to Americans, who are used to a floating currency. In Chicago, Chandler noted, currency futures are traded right next to livestock futures. The Chinese, in contrast, have a tradition of a highly managed currency. “Most countries don’t accept in principle that currencies should be traded like bacon,” Chandler said.
“Nobody knows officially how China gets to its fixing. It’s still a black box. It says it takes prices from many banks, more than a dozen, including foreign banks,” but there seem to be other considerations at work, he said. “My sense is that they’ve engineered this so it looks right. Now that it looks right, they’ll engineer the substance behind it.”
bloomberg: What happens in Beijing doesn’t stay in Beijing.
The high costs associated with maintaining the yuan’s peg to the U.S. dollar amid weakening economic data prompted a startling currency devaluation by China on Aug 11, 2015. Since then, the move has come to be viewed as the proximate cause for the upheavalin financial markets over the past month, and led to devaluations from other nations with fixed exchange rates.
Capital outflows have been Chinese policymakers’ biggest headache. These waves of money leaving the world’s second-largest economy are a source of downward pressure on the yuan and have a deleterious effect on domestic liquidity – the last thing a nation that’s enjoyed an extended run of buoyant, credit-fueled growth needs.
Because China’s delicate balancing act isn’t a permanent solution, market participants are wondering how – and when – it might end.
Analysts at Deutsche Bank, Barclays and Societe Generale estimated last week that the People’s Bank of China depleted its foreign reserves by between $100 to $200 billion in August in order to stabilize the yuan after the shock devaluation prompted traders to see how low the exchange rate could be pushed and capital outflows, in all likelihood, did not abate. As such, the recently stability in the exchange rate has been a façade – and an expensive one at that.
“The PBoC appeared to be heavily active in the spot market after the currency regime change on 11 August in order to stabilize the yuan,” wrote Societe Generale China economist Wei Yao.“Onshore yuan trading volume almost doubled in the 15 trading days following 11 August, compared to the previous 20 trading sessions and the year to date average.”
Meanwhile, Barclays’ rates and foreign exchange team estimates that the People’s Bank of China would have to cut the reserve requirement ratio by a minimum of 40 basis points per month just to offset negative effects on liquidity from its foreign exchange interventions, given the current pace of capital outflows.
This fragile equilibrium, however, could endure for longer than you might expect.
Even after the drawdown in August, Societe Generale’s Yao estimates that the People’s Bank of China has a hefty $3.5 trillion in foreign reserves. According to official data released on Monday, China’s currency hoard declined by a less-than-feared but still significant $93.9 billion in August, leaving it with $3.56 trillion remaining.
Chinese policymakers likely desire to maintain a sizable buffer in the form of foreign reserves, so Yao thinks they would only be willing to sell $1 trillion of their assets in order to defend the yuan. This suggests that China could probably maintain its current exchange-rate management tactics for many months, but not necessarily years.
Chinese policymakers can try to stabilize their exchange rate through actions other than direct intervention. Societe Generale’s Yao has suggested that the imposition of more capital controls could prevent more funds from leaving the country. On the other hand, Deutsche Bank Chief China Economist Zhiwei Zhang points out that the government could open up financial markets to more participants, like insurance companies, in order to induce flows into the country.
Mercifully for China, the storm appears to be abating, for now.
“On the first two trading days in September, the [dollar-yuan] rate actually had sizable appreciations with shrinking daily trading volumes,” observed Zhang.
But going forward, it’s only a matter of when and how much the yuan will fall, according to the analysts.
Barclays and Societe Generale are calling for the yuan to decline by 7 percent relative to the U.S. dollar by year-end, with Yao citing the futility of this “war of attrition against capital outflows.”
“[T]he longer that significant FX intervention takes place, such costs [in terms of foreign reserve depletion, tightening domestic liquidity, and the need to offset it] will increase, and likely only delaying, rather than reducing, expectations of further CNY depreciation,” added Barclays.
Deutsche Bank expects a much more modest depreciation for the duration of 2015. For now, Chinese policymakers will be content to watch how financial markets digest an interest rate hike from the Federal Reserve before making their next move, according to Zhang.
“We expect the government to keep the current arrangement for the rest of 2015, and monitor how international market reacts to rate hike in the U.S.,” he asserted. “It is unlikely that the People’s Bank of China attempts to repeat what it did on Aug. 11 before the U.S. rate hike.”
BEIJING, Aug. 29 (Xinhua) — The Ministry of Commerce (MOC) has defended China’s overhauling of its exchange rate formation mechanism, a move which has seen a significant drop in the Chinese yuan’s central parity rate against the U.S. dollar.
There has been concern in the international market over the connection between the yuan’s depreciation and China’s efforts to boost exports.
However, the MOC said in a statement late on Friday night that the drop, of 4.6 percent in three days after the adjustment on Aug. 11, was “a normal adjustment” and will have limited impact on foreign trade.
Since late last year, there had been a significant discrepancy between the yuan’s central parity rate and the spot trading rate. The new quotation regime of the central parity helped narrow the gap and allowed the market to play a bigger role in determining the yuan’s exchange rates, the statement said.
On Aug. 11, China’s central bank ordered that daily central parity quotes reported to the China Foreign Exchange Trade System before the market opens should be based on the closing rate of the inter-bank foreign exchange market the previous day, supply and demand, and price movement of major currencies.
After dipping 4.6 percent in the following three days, the yuan’s central parity against the dollar has since stabilized.
“Under a global value chain, there is a downstream and upstream industrial division and international trade within a single industry is very common. So the boosting effect on exports arising from a currency depreciation will be shared by various economies and thus weakened,” according to the MOC.
It said the impact of a one-off rate adjustment on Chinese exports will be limited because around half of it is accounted for by processing trade, in which products’ raw materials are imported to China and the finished products are re-exported after assembly.
There is no basis for continued depreciation of the yuan, and the exchange rate will be kept “basically stable at an adaptive and equilibrium level,” the statement also said.
China’s move last week to devalue the yuan has drawn much bad press, sparking talk of competitive devaluation, or currency wars. This is an overreaction. What the Chinese did was to bring the controlled yuan more in line with market forces.
BEIJING. Kebijakan bank sentral China menahan laju depresiasi nilai tukar yuan, diperkirakan kalangan ekonom bakal menggerus cadangan devisa negeri Tirai Bambu tersebut.
Menurut sejumlah ekonom yang disurvei Bloomberg, cadangan devisa China akan menyusut US$ 40 miliar per bulan akibat intervensi People’s Bank of China (PBOC) di pasar keuangan negeri tersebut. PBOC diperkirakan bakal mengucurkan dana cukup besar untuk menahan depresiasi kurs yuan.
Sebagai konsekuensinya, hingga akhir tahun ini, cadangan devisa China diproyeksi akan menyusut menjadi US$ 3,45 triliun dari posisi pada akhir Juli lalu sebesar US$ 3,65 triliun.
Ken Peng, analis dari Citigroup Inc di Hong Kong menilai, sebagai negara dengan cadangan devisa terbesar di dunia, China akan mengucurkan banyak cadangan devisa untuk mencapai tujuannya tersebut. “Bank sentral China akan sering melakukan intervensi di pasar valuta asing dalam tiga bulan ke depan untuk menjaga stabilitas mata uang yuan,” ungkap Peng.
Kebijakan intervensi PBOC menahan depresiasi yuan tersebut bertujuan untuk membatasi hengkangnya modal asing. Pasalnya, lebih dari dua dekade, laju pertumbuhan ekonomi di Negeri Panda itu mengalami perlambatan. Bahkan, untuk mendukung kebijakan intervensi PBOC, cadangan devisa China telah tergerus hingga US$ 192 juta dalam tujuh bulan terakhir.
Survei Bloomberg juga menunjukkan, di sisa akhir tahun ini, nilai tukar yuan terhadap dollar Amerika Serikat (AS) akan melemah 1,6% menjadi 6,50 per dollar AS.
Pada pekan lalu, otoritas moneter China memborong yuan melalui bank agen untuk menstabilkan nilai tukar yuan. Kebijakan ini dilakukan setelah pada 11 Agustus yuan didevaluasi akibat ekonomi China masih tergelincir dalam dua dekade. Setelah kebijakan devaluasi, dalam lima hari terakhir, mata uang yuan melemah 2,9% menjadi 6,3947 per dollar AS. Pada Senin lalu (17/8), nilai tukar yuan diperdagangkan turun 0,05%.
Huang Wentao dan Zheng Lingyi, analis dari China Securities Co berpendapat, China akan terus mengeluarkan biaya yang besar untuk mempertahankan stabilitas nilai tukar yuan terhadap dollar AS. “Ini termasuk mengorbankan ekspor dan menggunakan cadangan devisa,” ujar Wentao.
Shanghai -Semua orang punya mimpi buruk. Bagi investor global, mimpi buruk terbarunya adalah China. Kok bisa?
Bagi investor, kestabilan ekonomi adalah segala-galanya. Tidak perlu naik terlalu tinggi, tidak juga anjlok sangat dalam, yang penting stabil dan tumbuh secara perlahan.
Nah, kestabilan itu dirusak oleh Negeri Tirai Bambu, mulai dari pasar saham yang anjlok hingga pelemahan nilai tukar yuan terhadap dolar Amerika Serikat (AS) yang disengaja oleh the People’s Bank of China.
Situasi di China menjadi lebih menakutkan ketimbang, jatuhnya harga minyak, melonjaknya dolar AS, gejolak di Yunani, bahkan rencana naiknya suku bunga The Federal Reserve.
Pekan lalu, China sudah bikin geger gara-gara sengaja melemahkan yuan. Negara dengan ekonomi terbesar kedua itu ingin menaikkan daya saing ekspornya yang sedang melambat.
“Apakah mereka (China) tidak tahu apa yang sudah mereka lakukan? Sepertinya begitu, dan ini membuat investor di seluruh dunia mulai ketakutan,” ujar Ed Yardeni, President Direktur Yardeni Research dalam riset yang dibagikan kepada kliennya, seperti dikutip CNN, Rabu (18/8/2015).
Kemarin, mimpi buruk investor datang lagi. Indeks Komposit Shanghai terjun bebas hingga 6,2% dalam sehari.
The most shocking thing about the world’s reaction to China’s decision to devalue the yuan was that anyone should have been surprised. For those who have watched China’s deteriorating economic growth since late 2014 and the ineffectiveness of monetary easing by the People’s Bank of China, the country’s central bank, currency devaluation appeared to be not only logical, but also inevitable.
Since recording its last double-digit rate of 10.4% in 2010, China’s economic growth has slowed by 3 percentage points over four years to 7.4% in 2014. In response, Chinese policymakers injected massive amounts of credit into the economy. Although estimates vary, total credit growth from 2011 to 2014 probably equaled 100% of Chinese gross domestic product, raising the debt-to-GDP ratio to around 280% at the end of 2014, according to McKinsey, the business consultancy.
Undeterred by the prospect of creating a financial crisis, the Chinese government continued to double down on monetary easing. Since last November, the PBOC has cut interest rates four times by a total of 115 basis points and lowered the reserve ratio (the amount of cash banks are required to hold) three times by 150 basis points.
This injection of new credit did not do much to revive China’s investment growth, but it did help inflate a gigantic stock market bubble that temporarily created a mirage of prosperity.
Unfortunately, the bubble started to collapse in mid-June, forcing Beijing to launch an aggressive and hugely expensive rescue operation to prevent share prices crashing. Meanwhile, the economy deteriorated further. In July, Chinese exports fell 8.3% while its purchasing managers index reading was 47.8%, the lowest in two years.
If we have learned anything about how Beijing deals with difficult economic challenges since the 2008 global financial crisis, it is about its leaders’ attitude of “whatever it takes” and “shoot first (ask questions later).” The decisive factor in any decision has always been maintaining economic growth.
To be fair to President Xi Jinping and Premier Li Keqiang, they inherited an economic mess in late 2012. A decade of prosperity fueled by explosive export growth, following China’s entry into the World Trade Organization and a resulting real estate and infrastructure investment boom, dampened appetite for reform and created an economy saddled with debt, a property bubble and immense manufacturing overcapacity.
After becoming head of the Communist Party in 2012, Xi knew that the party’s long-term survival and his own political fortune would rest on reviving growth through structural reforms. Exactly a year after his appointment, Xi launched an ambitious long-term blueprint for economic reforms.
Unfortunately, only modest reforms, mainly in the financial sector, have been implemented in the last two years. Besides being unfairly blamed for fueling the stock market bubble, the liberalization of interest rates and capital controls had no discernible positive impact on growth. Meanwhile, measures more urgently needed, but also more painful, such as financial deleveraging, closing “zombie” firms, and downsizing state-owned enterprises, were delayed or resisted.
As long as Xi enjoyed an extended political honeymoon as a result of his crackdown on official corruption, he did not have to worry too much about poor economic performance. But things have changed in recent months.
After tightening up and jailing many corrupt senior officials, known as “tigers,” Xi apparently is running out of easy targets. Like a military conflict, an anti-corruption campaign requires constant escalation to demonstrate the dominance of the victor.
Xi has become a victim of his own early success. Now he finds himself in a dilemma: to maintain credibility and political dominance, he needs to go after even bigger tigers. Given the rot at the top of China’s Communist Party, there are plenty of super tigers left to catch. But the political costs will be very high as Xi increasingly risks an open split with the most powerful factions in the party.
At the same time, the law of diminishing returns has set in. Ordinary people who have been cheering the fall of tigers and junior official “flies” are now gaining less satisfaction from the spectacles of formerly high-flying officials confessing their sins in court. It is nice to have a less corrupt government, but it would be even nicer to have a cleaner government that can also deliver economic prosperity.
With less than two and half years left in his first term, time is running out for Xi to demonstrate his capability as a strong leader who can both clean house and revive China’s sagging economic fortunes. If he fails to deliver real economic improvement in the next two years, Xi will have considerably less political capital in the fall of 2017, when the party convenes its 19th congress to decide whether to make him a lame duck by anointing his successor.
The pivotal event, in retrospect, that influenced China’s decision to devalue was the rise and fall of the country’s stock market bubble. The bubble initially boosted confidence and, had it lasted, might have lifted short-term growth. But its untimely collapse forced Beijing to resort to desperate measures.
In the immediate aftermath of the bursting of the bubble, the Chinese government pumped more than one trillion yuan into the stock market to support overvalued equity prices, unnecessarily fearing that further market declines would trigger a runaway financial crisis that would further depress growth.
As Beijing had relied principally on the PBOC’s liquidity support to prop up the market bubble, it then curbed the central bank’s future capacity to stimulate the economy. After all, you can only print so much money without causing high inflation and other serious macroeconomic problems.
That left Chinese policymakers with only one quick solution to reinvigorate growth, which was devaluation. Of course, Beijing has skillfully packaged this move as part of reforms to make the yuan more flexible. In a technical sense, this is true.
But when you examine the domestic political context of the decision to devalue the currency, it can be seen as a desperate — and a likely unsuccessful — act to export China’s economic woes to a global economy that mirrors the country’s own structural economic maladies: anemic demand, mountainous debts, and excess capacity.
Those familiar with Beijing’s “whatever it takes” and “shoot first” modus operandi cannot help but feel that they are watching the same horror movie all over again.
NIKKEI ASIAN REVIEW
Minxin Pei is a professor of government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States.
Beijing – Tingkat paritas tengah nilai tukar mata uang China renminbi atau yuan, menguat 35 basis poin menjadi 6,3975 terhadap dolar AS, Jumat (14/08/2015). Itu setelah selama tiga hari merosot, menurut Sistem Perdagangan Valuta Asing China.
Di pasar spot valuta asing China, yuan diperbolehkan untuk naik atau turun sebesar dua persen dari tingkat paritas tengahnya setiap hari perdagangan. Bank sentral China, People’s Bank of China (PBoC) mereformasi sistem pembentukan nilai tukar pada 11 Agustus 2015 menjadi lebih mencerminkan pengembangan pasar dalam nilai tukar yuan China terhadap dolar AS.
Tingkat paritas tengah yuan terhadap dolar AS didasarkan pada rata-rata tertimbang dari harga yang ditawarkan oleh pelaku pasar sebelum pembukaan pasar setiap hari kerja dan juga mengacu pada tingkat penutupan pada hari sebelumnya, dalam hubungannya dengan kondisi penawaran dan permintaan serta pergerakan mata uang utama.
BEIJING nikkei– It took just three days to show the limits of China’s risky attempt at devaluing its way out of an economic jam.
Over that period, the People’s Bank of China lowered the guidance rate around which the currency floats by about 4.5%, starting with a sudden, nearly 2% drop Tuesday.
A gap of “about 3%” had separated the benchmark from market rates, PBOC Assistant Gov. Zhang Xiaohui said in a rare news conference Thursday. The bank’s “correction” had “basically ended,” Zhang said, indicating that big reductions were no longer needed.
Deputy Gov. Yi Gang called speculation that the central bank would devalue the yuan by 10% to stimulate exports “groundless.” Yi flatly denied what most observers saw as a clear aim of lowering the guidance rate: helping Chinese-made goods compete in foreign markets.
Only a select few media outlets were let into the briefing — a type of affair that lives up to its Chinese name, chui feng hui, which literally means “blow-the-wind meetings.” Reporters heard only what the monetary authorities wanted them to. Top PBOC officials do not hold regular news conferences; this one was essentially forced by market unrest.
The currency moves, too, were a forced response to an unexpectedly deep economic slowdown. Gauges of industrial output, investment, consumption and exports all worsened in July. Export-driven companies welcome a weak yuan — computer manufacturer Lenovo Group said so, in fact. A set of export promotion measures drawn up by the government late last month included a proposal for increasing the yuan’s downside potential.
Massively devaluing the yuan would disrupt global financial markets and rile the U.S., which already has a yawning trade deficit with China. It could also lead to rapid capital outflows from China. That Beijing tried such a risky policy gives an indication of its economic predicament.
The PBOC, meanwhile, needed a way to increase the potency of its monetary easing. It had been keeping the yuan artificially strong against downward pressures, in line with the Xi government’s goal of raising the currency’s international standing. This entailed buying up yuan, taking them out of circulation and, in effect, counteracting its own monetary stimulus.
The central bank has cut interest rates and taken other steps to loosen credit four times since last fall, but the economy has refused to perk up as hoped. This lack of improvement seems to have driven the PBOC to put supporting the economy ahead of padding the yuan’s role in trade and investment.
Indonesia masuk masa resesi dan rupiah terjebak dalam currency war yang dilakukan Jepang, Tiongkok dan AS.
Jakarta—Kebijakan devaluasi mata uang Tiongkok, Yuan turut memperdalam pelemahan Rupiah. Sayangnya, kabarnya Tiongkok diperkirakan masih akan melakukan devaluasi secara gradually.
Martin Panggabean, Chief Economist IGIco Advisory mengatakan, agar Indonesia tidak menjadi ‘korban’ dari kebijakan finansial negara lain, maka pemerintah perlu menyiapkan grand plan strategy dalam menghadapi global currency war.
“Dampak global currency war terhadap kondisi Indonesia ini akan berpengaruh sangat signifikan, karena perekonomian kita sangat rentan. Defisit terhadap Tiongkok akan membengkak, karena banyak proyek infrastruktur di Tanah Air mengandalkan Tiongkok. Tidak hanya raw material, capital goods, tetapi juga human resources,” ungkap Martin.
Menurut Martin, Indonesia dengan pertumbuhan sekitar 5% menjadi target empuk bagi pertarungan negara-negara seperti Tiongkok Jepang dan lainnya sebagai pasar mereka. Global currency war, tambahnya adalah sebuah kenyataan bahwa rupiah ikut melemah, dan ini merupakan blessing in disguise. Setelah melemah sejak 2013, PPP index Indonesia ternyata mirip dengan Malaysia yang juga adalah kompetitor Indonesia di pasar minyak kelapa sawit, coklat dan karet.
“Artinya bila Rupiah tidak melemah ke level Rp13.000an per dolar AS, maka ekonomi Indonesia yang menjadi bermasalah dalam konteks perdagangan internasional,” tambahnya.
Martin menjelaskan, dengan pendekatan ekspektasi pasar ini pelaku pasar finansial (pemodal) terlihat cenderung pesimis terhadap kinerja perekonomian Indonesia. “Perlu disadari bahwa ekonomi Indonesia sedang memasuki fase resesi, sementara ekonomi Amerika Serikat justru akan meninggalkan resesi, dan masuk ke fase normal. Dengan demikian penguatan dolar US adalah konsekuensi yang wajar.”
Menurut Martin, fase pesimisme ini dimulai sejak Februari (pada saat kurs masih pada Rp12.600 pe dolar AS) dan terus memburuk sejak itu. Jika pada awal tahun para pelaku pasar masih memperkirakan adanya depresiasi sebesar 5.5% sepanjang 2015, kini para pelaku pasar memperkirakan bahwa depresiasi 12 bulan kedepan adalah sekitar 11%.
Dia menilai para pelaku pasar saat ini memperkirakan bahwa kurs pada akhir tahun 2015 akan berada pada kisaran Rp14.000 per dolar AS, sementara pada akhir 2016 kurs sudah mendekati level Rp15.000 per dolar AS.
Keputusan tiba-tiba The People’s Bank of China (POB) yang mendevaluasi 1,9% langsung menohok pasar keuangan global, diperkirakan masih akan berlanjut. Tiongkok secara gradually akan melemahkan mata uangnya. “Sama seperti dulu secara gradually mereka menguatkan mata uangnya. Kondisi ini yang akan membuat pasar sulit stabil dan unpredictable.”
Sebelumnya, lanjut Martin, Jepang telah mengambil langkah kebijakan devaluasi untuk menumbuhkan ekspor dan ini terbilang sukses, bahkan tanpa kritik dari Amerika Serikat serta negara barat lainnya.
”Belum lagi IMF membatalkan rencana memasukkan Yuan kedalam SDR (Special Drawing Rights). Momentum inilah yang digunakan Tiongkok untuk melemahkan mata uangnya. Big Questions untuk kita adalah : Berapa kali Tiongkok akan melakukan devalusi mata uangnya,” tegas Martin.
Untuk itu, pemerintah dengan tim menteri koordinator ekonomi yang baru diharapkan mempunyai strategi dan grand plan “briliant” untuk menghadapi pertarungan mata uang global ini. Martin memperkirakan, dalam 6 bulan kedepan Tiongkok tidak akan berhenti melakukan devaluasi sampai terjadi recovery ekonomi didalam negerinya.
“Berarti currency war masih berlanjut. Tiongkok akan sangat kuat terhadap tekanan Amerika Serikat dan negara barat lainnya, karena negara Paman Sam sudah kehilangan kredibilitasnya ketika tidak mengkritisi kebijakan Jepang dalam melakukan devaluasi, secara eksplisit,” jelasnya.
Dia menambahkan, kebijakan Tiongkok tidak akan berhenti hanya di pasar finansial saja, goal-nya adalah ekspor ke berbagai negara di dunia.
“Saat ini pasar akan bergerak, rupiah akan rentan, kita akan menjadi sasaran produk impor. Lalu bagaimana respon pemerintah untuk dapat benefit maksimum dari kondisi ini,” jelasnya.
Martin berharap Tim Ekonomi yang dipimpin Darmin Nasution dapat meyakinkan pasar, dalam melakukan pengendalian defisit government, serta pengendalian current account. Selain itu pemerintah bersama dengan OJK dan Bank Indonesia juga diharapkan menyiapkan strategi ketahanan industri perbankan terhadap serangan currency war.
China’s currency cuts aren’t always an attempt to bail out exporters. The most recent move has bigger policy implications.
Donald Trump may very well have a field day with today’s currency news, as analysts predict. But he shouldn’t.
Today China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S. dollar. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S. dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.
Trump and others may say China is purposely devaluing its currency to help exports. After all, its economy is struggling to hit the government 7% growth target.
But is that what’s really going on?
For the most part, China has recently actually wanted its currency to steadily rise, for political reasons and to keep capital from flowing out of China. China’s domestic and international goals align with a stronger yuan. That helps explain why presidential candidates like Trump haven’t been spouting off about China’s currency management as much of late.
The answer to why China’s government devalued its currency Tuesday probably has more to do with the dynamics of global currency markets than a sudden urge to help Chinese exporters make their goods cheaper on the world market.
First, the yuan is strongly related to the dollar because China still manages the exchange rate within a range against the dollar. When the U.S. dollar rises rapidly against world currencies, like it has in the past year to pull almost even with the euro, the yuan also rises against China’s trading partners’ currencies.
China has wanted the yuan to steadily rise against trade-weighted partners for a while. To keep that appreciation gradual, as the dollar rockets upwards, it may have to devalue a little, says Jonathan Anderson, at Emerging Advisors Group, one of the clearest observers of China’s markets. “But this is not the same as a “competitive devaluation” of the renminbi —and there’s nothing like that on the cards,” he wrote today.
“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20% to 40% devaluation against the dollar.” (menurut gw berarti Yuan akan terdepresiasi ke 1US$ = 7-8 Yuan dalam setaon ke depan).
If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage. A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners’ currencies, which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune piece.)
As mentioned, China actually wants a stronger currency. As recently as April, it was actively trying to strengthen the yuan, the Wall Street Journal reported. The country’s central bank purchased the yuan in the currency markets and sold U.S. dollar holdings, a move aimed at stemming capital outflows from China as the yuan was falling.
As Chen Long of Gavekal Dragonomics in Hong Kong recently explained, China has twin (and sometimes competing) goals for exchange rates. On the domestic front, it wants to help exporters with a cheaper currency, but it also wants to maintain a strong currency to prevent capital outflows that may weaken the country’s economy further. On the international side, China wants to avoid a trade war with the U.S., which it would have if it severely weakened the currency. It also wants to boost international use of the yuan for political purposes, as China asserts itself more strongly around the world. The country’s recent campaign to have the yuan join the mostly meaningless IMF reserve currency is one example of China desiring a strong currency. In the end, these multiple goals again promote a slightly stronger currency.
China’s central bank said Tuesday’s yuan depreciation was a way to make the country’s financial system more market-oriented. The bank said market spot prices would now determine the daily position, implying that the central bank would step in less to influence it. Over the past few months the yuan-dollar spot price had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.
There are reasons the government doesn’t deserve the benefit of the doubt when it says it’s in the business of market-based approaches. President Xi Jinping’s administration said the same thing before pledging around$800 billion in government money last month to prop up the falling stock market. China’s words and actions don’t always match.
But there are also reasons that today’s devaluation shouldn’t only be viewed through the prism of trade. First, other exporters in Asia, including South Korea and Taiwan, are hurting because of weak demand abroad. Sluggish economies in Europe and the U.S. influence China’s exports. That’s is not all solved by currency devaluations. Second, China can use other mechanisms to boost its economy. Internet rates and bank reserve requirements can still be cut considerably, and analysts expect that to happen. More government spending is already in the works: China’s banks will issue 1 trillion yuan worth of bonds for infrastructure spending, according to recentreports.
For now, it’s too early to say China is starting a currency war, even if that may be the West’s first inclination.