Contrary to the complaints of some politicians, it’s not undervalued. Sep 28, 2015, Vol. 21, No. 03 • By CHARLES WOLF
Last month, China devalued its currency, slightly lowering the bottom of the range within which market forces can determine the yuan’s foreign exchange value. The central bank’s announcement triggered severe repercussions in global financial markets—but it was inaccurate and incomplete.
The statement from the People’s Bank of China (PBOC) hinted that the yuan—also known as the renminbi (RMB), literally “people’s currency”—is likely to lose more value in the coming months. Strictly speaking, “devaluation” signifies movement from a higher pegged exchange rate to a lower, equally pegged rate. With the announcement foreshadowing gradual movement toward a lower foreign exchange value for the RMB, it’s more accurate to characterize it as depreciation.
Even more indicative is what the disclosure left out. While acknowledging the underlying aims of offsetting GDP growth slowdown and boosting exports, the PBOC omitted any mention of other significant, if complicated, motives behind the depreciation.
Prominent among these goals is China’s aspiration for the RMB to become an international reserve currency, along with the dollar and, to a lesser extent, the euro. With this aim comes the quintessential requirement that a reserve currency be freely convertible into other currencies—that is, freely “floating” in value relative to other currencies—rather than selectively convertible and partly blocked from conversion into other currencies, which is the RMB’s present status. The RMB is readily convertible for companies, investors, and individuals that the PBOC and the State Administration of Foreign Exchange view as “approved” and “reliable.” Examples include Alibaba, Hua Wei, ZTE, Lenovo, and other brand-name Chinese companies, plus China’s state-owned enterprises, such as the China National Offshore Oil Corporation, the China Chemical Company, and the China Petrochemical Corporation. “Approved” and “reliable” individuals include Zhang Xin, China’s billionaire real estate developer, and a few others in the field (“reliable” includes a presumption that those so characterized will earn and transmit back to China sufficient dollars to overcompensate for their prior dollar investments). For other holders of RMB currency deposits, convertibility is often delayed, time-consuming, and uncertain. This large-scale government-managed convertibility is inconsistent with the freely floating convertibility of a global reserve currency.
The bank hoped the depreciation would be seen as moving the RMB closer to its “true” (or “equilibrium”) range in foreign exchange markets. China seemingly prefers that this appraisal be arrived at through a smoothly paced process in which market forces are “guided” by the PBOC rather than allowed to operate freely, which would make the currency prone to volatility. This preference is unrealistic and self-contradictory.
Another possible motive was countering the sharp downturn in the Shenzhen and Shanghai securities markets using the indirect instruments of monetary policy favored by the central bank, including expanding the money supply through gradual currency depreciation. But other members of the top leadership preferred and immediately invoked more direct and blunt instruments by suspending trading, disallowing short-sales, and making direct government purchases of vulnerable equities to counter the markets’ precipitous fall.
Other salient aims of currency depreciation relate to key components of China’s inflow and outflow of capital. On one hand, China’s large (yet perhaps underestimated) GDP slowdown might be alleviated by foreign direct investment in China (capital inflow). On the other hand, GDP growth might be enhanced by Chinese companies’ or individual investors’ acquisition of higher-yielding foreign companies and equities (capital outflow). If and as gradual depreciation proceeds to a reasonably stable range, an appropriate balance between the two capital flows may ensue.
I conjecture that a “reasonably stable range” for the RMB’s foreign exchange value is likely to lie between 7 and 8 RMB per U.S. dollar (1 RMB=13-14 U.S. cents), rather than 5-6 RMB per dollar (17-20 cents); today, its foreign exchange value is 6.4 per dollar (15.6 cents). Several congressional leaders and a few presidential candidates have argued—and sometimes continue to argue—that China’s currency was undervalued, not overvalued. I’d opine instead that the RMB was and is overvalued, warranting depreciation, not appreciation.
2:11 PM, Sep 4, 2015 • By CHARLES SAUER
Bitcoin value dropped significantly in August, which proves that Bitcoin and crypto-currency markets are still developing. The value of Bitcoin is tumultuous to put it lightly, but dropping from $256 on August 17th to $200 on the 25th of August is pretty a big deal.
4:03 PM, Jun 19, 2015 • By NOEMIE EMERY
Alexander Hamilton can’t get no respect. First, he gets born with at least four strikes against him---in the British West Indies, not exactly the hub of the universe; poor, illegitimate, dead-beat dad, and mother dead when he was eleven; then he blunders into the first great sex scandal of the nascent Republic; then he gets murdered at age 49, shot in a duel by the sitting vice-president, a sociopath who was running a side-line in plotting secession, creating a new state in which he’d be King.
12:01 AM, Apr 11, 2015 • By IRWIN M. STELZER
The strong dollar, warns Larry Fink, CEO of BlackRock in a letter to be released to shareholders next week, “will lead to an erosion of confidence on the part of CEOs, with the potential to slow both investment decisions and future growth in the U.S.” When you manage almost $5 trillion in assets, and monitor perhaps twice that much for the U.S.
12:01 AM, Jan 31, 2015 • By IRWIN M. STELZER
On April 5, 1933, Franklin Roosevelt did it right here in the White House. On August 15, 1971 Richard Nixon came back from Camp David and did it. On September 22, 1985, Ronald Reagan went to the Plaza Hotel and did it.
American presidents are not the only ones who did it. Chinese communists do it often and are doing it now, as is Japan’s Prime Minister Shinzo Abe. And Mario Draghi, the head of the European Central Bank, finally decided to do it right there in Frankfurt even though his German overseers disapprove.
11:25 AM, Jun 23, 2014 • By DANIEL HALPER
Greg Abbott, the Republican candidate for governor in Texas, is now accepting the digital currency Bitcoin. He's just now released this ad, letting supporters know:
11:35 AM, Mar 5, 2014 • By JONATHAN V. LAST
"Bitcoin" is the most widespread, cryptographically-secure Internet currency. It was created in 2009 by someone (or someones) who referred to themselves as "Satoshi Nakamoto." Once it was released into the wild, the bitcoin currency ecosystem operated on a public, inalterable schedule.
12:00 AM, Feb 9, 2013 • By IRWIN M. STELZER
Growth is the summum bonum of economic policy. Tough to arrange at home: stimulus packages don’t work very well, and monetary policy produces lots of fiat money but not very many jobs. The solution: export-led growth—the other guy will buy so much of your goods and services that your economy will grow. There are two ways to make this sort of growth happen. Lower the international value of your currency so that your output is cheaper overseas, or increase productivity at home by lowering labor and other costs and therefore the prices you need to charge foreigners.
12:41 PM, Oct 12, 2011 • By MICHAEL WARREN
During Tuesday night’s debate in New Hampshire, moderator Karen Tumulty challenged Mitt Romney on his recent tough talk on China. Romney says China is a “currency manipulator” and argues that, by setting unfair prices and allowing the theft of American intellectual property, the Chinese government is cheating world markets and must be held accountable
Not yet.12:00 AM, May 28, 2011 • By IRWIN M. STELZER
The fuss about a possible default if our warring politicians fail to agree on an increase in the debt ceiling is good fun for reporters: the president removed himself from the negotiations in favor of a visit to the Palace and says he won’t agree to cut spending unless the Republicans agree to raise taxes on the rich, variously defined as families earning more than $250,000 per year and “millionaires and billionaires.”
A currency divided against itself cannot stand.May 9, 2011, Vol. 16, No. 32 • By IRWIN M. STELZER
A spectre is haunting Europe—the spectre of the disintegration of the eurozone. All the powers of old Europe have entered into a holy alliance to exorcize this spectre: German chancellor and French president, the Brussels eurocracy and the bonus-laden bankers. Let the ruling classes tremble. The debtors have nothing to lose but their burdens.
12:00 AM, Oct 23, 2010 • By IRWIN M. STELZER
The good news, as reported by the Federal Reserve Board survey of business conditions, is that “on balance, national economic activity continued to rise” in September and at the beginning of this month.