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Wrong-Way RMB?

By Shlomo Maital


  Financial Times reports that “China devalued the yuan by the most in two decades, a move that rippled through global markets as policy makers stepped up efforts to support exporters and boost the role of market pricing in Asia’s largest economy.  The central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended a dual-currency system in January 1994. The People’s Bank of China called the change a one-time adjustment and said its fixing will become more aligned with supply and demand.”    The renminbi is seriously undervalued; its purchasing power is about 4 RMB per dollar, not 6.  So why devalue it, send it in the other direction?

    What is going on?

     Well, depends who you believe.  Financial Times’  ‘take’  is that China is starting a currency war, a la 1930’s,  with countries competitively devaluing their currency to gain export markets and stimulate their economy, while exporting unemployment.  The small 2 % devaluation shows China’s leadership is “desperate”:    

    According to conventional wisdom, wars are easy to start and difficult to end. Similarly Beijing’s devaluation, the biggest one-day currency move since 1993, represents the latest skirmish in an emerging battle which, analysts warn, may be hard to reverse.  The move marks a shift in China’s historical policy during times of economic stress. In the late 1990s, the country was widely credited with containing the destruction from the Asian financial crisis because it held fast to the renminbi exchange rate in the midst of competitive devaluations throughout the region.  In the global financial crisis of 2008, Beijing also refused to devalue even as its exports, a key driver of the economy, evaporated overnight. But now, in the midst of a pronounced and persistent Chinese economic slowdown and continued appreciation pressure resulting from the renminbi’s “dirty peg” to the soaring US dollar, China’s leaders have decided to take the plunge.  “This shows how desperate the government is over the state of the economy,” said Fraser Howie, a China analyst and co-author of Red Capitalism. “If they were trying, as the central bank said it was, to bring the exchange rate back into line with market expectations then they have failed miserably as the market is now just expecting further devaluation.”

   But here is Neil Irwin’s ‘take’, in The New York Times:   China is seeking twin goals,  keeping the flagging economy going and establishing the RMB as a global currency, by allowing market forces to work, rather than pegging the RMB artificially to a soaring dollar.   

   And my own view:   With the dollar losing its pre-eminence as a world currency, largely because the Fed has printed far too many of them, for domestic policy purposes,  the world does need a strong well-managed global currency.  It could be the RMB?  

    Who is right?   Well, dear reader, in this, as in other issues,  you’ll have to think for yourself.  The main thing is,  be sure you are fully aware of the real issues the world faces, and not some of the puff pieces that fill our newspapers and news websites.  China, and everything that goes on there, is one of those key issues. 



 When Will the Yuan Replace the Dollar?

By Shlomo  Maital


 Most of the world’s foreign trade and foreign investment is still done in dollars.  Perhaps 80 percent or more of transactions on the London foreign exchange market, still the world’s biggest, involve dollars.    

  For the global economy, this is a problem.  America’s economy is weak and unstable, hence so is the currency – and the currency is not just America’s money, but it is the world’s, so when America has a problem, so do we all.  As the U.S. Treasury Secretary once said, the dollar is our currency – and your (the world’s) problem.

   With China’s economy now the world’s largest, by some measures, it makes sense that the Chinese currency, the renminbi (ren – min – bi,  ‘money of the people’) should take a correspondingly important role in world trade and finance.  But China has been unwilling to loosen its tight control of the RMB, because the undervalued exchange rate, around 6 RMB per dollar, provides strong advantages for exports.   Since 2005, though, China has been gradually (everything China does is gradual) loosening control of the RMB (that was the year it dropped the fixed ‘peg’, or fixed exchange rate, and let the RMB slowly slowly gain in value) and since 2009, it has loosened restrictions on yuan trading outside China. 

    Now, according to the Wall Street Journal, more and more American firms are paying for Chinese goods in RMB (yuan).  Ford Motor Co., for instance, has reacted swiftly to the China’s government easing of restrictions on use of the yuan by global companies.  There are big advantages – if you can pay directly in yuan, you can save substantial trading costs.   

  U.S.-China trade totals $500 b.  America has been pressing China for years to let its currency appreciate more, reflecting its true value, and making Chinese exports more expensive.

    According to the B.I.S. (Swiss-based Bank for International Settlements), the Central Banks’ bank,  the yuan is the 9th most traded currency in the world. 

    Ninth is very far from first. But look for the yuan to move up in the World Cup forex rankings.   There are big opportunities here for experts in forex and financial services.   Japan, for instance, doggedly resists making the yen a global currency, by imposing restrictions on foreign currency movements into and out of Japan.  I believe this was a big mistake.  China seems about to avoid Japan’s strategic error.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital