For the first time since March 2008, PBOC fixed the yuan weaker than 7 per USD....
We argue that policymakers in China are now going to be more accepting of USD/CNY appreciation through 7: years of regulatory measures should make outflows more manageable, easier monetary policy will add upside pressure and a weakening FX is the natural means of offsetting tariffs....Zero Hedge
China needs to keep growth high enough to maintain social stability, but also must preserve external stability via the renminbi’s exchange rate. How China manages its currency during its economic policy shift could have important global consequences.
The vast majority of economists believe that the Fed's asset holdings keep down U.S. interest rates. It is inconsistent to believe that the Fed's holdings of U.S. assets keep down interest rates here, but China's holding of foreign assets does not keep down the value of its currency.Beat the Press
HSBC chief executive Stuart Gulliver, speaking at the same conference in Hong Kong, said that the Belt and Road Initiative (BRI) will increase the usage of RMB even further.
China’s central bank announced new measures earlier this month to encourage cross-border yuan transactions in support of BRI projects.Asia Times
Perhaps the best way for China to counter President-elect Trump’s outdated claims of manipulation would be to let the currency float. In the short run, however, that would almost surely trigger a plunge versus the U.S. dollar. Given China’s strong penchant for market intervention—including its unfortunate role in the 2015-2016 stock market boom and bust—Chinese savers may simply rush for the exit, fearing that anxious policymakers will slam the gate quickly.
In the end, there is no way to make such a fixed exchange rate regime less awkward without risking a bout of instability. Over the long run, capital controls won’t solve the problem; instead, they will further diminish the efficiency with which the country’s savings are used. For a large economy like China that is integrated into the global trading system, the global norm is a floating currency. Absent a trade war (and perhaps even with one), that’s still probably where we are headed within a few years. And, it’s increasingly a question of when, not if.Money and Banking
Zhang Yuting lives and works in Shanghai, has only visited the United States once, and rarely needs to use foreign currency. But that hasn’t stopped the 29-year-old accountant from putting a slice of her bank savings into the greenback.
She is not alone. In the first 11 months of 2016, official figures show that foreign currency bank deposits owned by Chinese households rose by almost 32 percent, propelled by the yuan's recent fall to eight-year lows against the dollar.
The rapid rise - almost four times the growth rate for total deposits in the yuan and other currencies as recorded in central bank data – comes at a time when the yuan is under intense pressure from capital outflows. The outflows are partially a result of concerns that the yuan is going to weaken further as U.S. interest rates rise, and because of lingering concerns about the health of the Chinese economy.Reuters
Some of the biggest names in the hedge-fund industry are piling up bets against China’s currency, setting up a showdown between Wall Street and the leaders of the world’s second-largest economy.
Kyle Bass’s Hayman Capital Management has sold off the bulk of its investments in stocks, commodities and bonds so it can focus on shorting Asian currencies, including the yuan and the Hong Kong dollar.
It is the biggest concentrated wager that the Dallas-based firm has made since its profitable bet years ago against the U.S. housing market. About 85% of Hayman Capital’s portfolio is now invested in trades that are expected to pay off if the yuan and Hong Kong dollar depreciate over the next three years—a bet with billions of dollars on the line, including borrowed money.…Across the Curve
Recognising the challenge, the US intensively lobbied allied states in Asia and Europe to stay out of the AIIB, arguing that it would not meet IMF and World Bank standards of transparency, environmental and social responsibility, and democratic governance. The argument would have been more convincing had the IMF not been the arm of coercive Euro-Atlantic discipline for the South. With the exception of Japan, the US proved unable to sway its closest partners.…
The decision to found the NDB and AIIB is the outcome of a movement building since the 1990s in East Asia and Latin America in reaction to IMF mismanagement of regional financial crises. The 1997-8 Asian crisis convinced many East Asian policy makers that it was time to take the future into their own hands and seek greater autonomy. The creation of the new system has huge implications: the ability to set policy frameworks and maintain international regimes through multilateral institutions is an essential dimension of power in world politics. Former Treasury Secretary Lawrence Summers wrote that October 2014 (when the AIIB was formed) “may be remembered as the moment the United States lost its role as the underwriter of the global economic system….Multipolar geopolitical political systems based on national sovereignty are potentially much less stable than unipolar systems, but only if the unipolar system is run in the interest of all instead of a hegemon. The US blew this opportunity badly. Now the future is uncertain as power blocs and spheres of interest again form.
China's central bank wants to launch its own digital currencies to cut the costs of circulating traditional paper money and boost policymakers' control of money supply, the People's Bank of China (PBOC) said on Wednesday.
A PBOC research team set up in 2014 to look into digital currencies should make preparations for launches, according to a central bank statement posted on www.pbc.gov.cn.
"The team ... should set up a clearer strategic target for launching digital currencies, overcome the key technological barriers ... and aim for an early launch of the central bank's digital currencies," the PBOC said.China leads the way.
Virtual currencies can also help boost transparency of economic activities and curb money laundering and tax evasions, it added.…
What Xi is running up against is what international economists call the trilemma, or the impossible trinity. It says that a country can’t have all three of the following things at once: a flexible monetary policy, free flows of capital, and a fixed exchange rate. They fight one another. As soon as China started allowing free (or at least freer) flows of capital, it was inevitable that it would have to give up on one of the other two objectives. If it wanted to keep the yuan from falling, it would have to raise interest rates higher than is good for the domestic economy, essentially giving up on setting an appropriate monetary policy. Or, if it wanted to set interest rates as it pleased, it would have to allow the yuan to sink.Drop the dollar peg and let the yuan float, like Russia did.
The latest changes to China's forex market management will increase yuan volatility and boost trading volumes, according to a leading Chinese investment firm.
From Jan. 4, closing time for China's interbank foreign exchange market will be extended from 4:30 p.m. to 11:30 p.m. Beijing time, the People's Bank of China announced last week, adding foreign institutions' access to the market will also be expanded.
The yuan exchange rate may become slightly more volatile, China International Capital Corp. (CICC) said in an analysis note.
By overlapping the trading hours with those of London, the spread between onshore and offshore yuan exchange rates will be narrowed, bringing down the technical difficulty for RMB users to hedge forex risk, it said.
After the changes, China's forex market is set to grow, especially in terms of trading volume, which represents a major opportunity for financial institutions with forex expertise and cross-border capacity, the CICC predicted.China.org.cn
One of the few forecasters to predict both the start and peak of China’s equity boom, is now warning the nation will be buffeted by the same forces that caused financial crises around the world over the past four decades.Bloomberg Business
Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong, says a shortage of dollars was the common feature in the oil rout in the 1970s, Latin American debt turmoil in the 1980s, the Asian currencies collapse in 1997 and the global crisis in 2008. Next year will see Federal Reserve interest-rate increases, an improving U.S. current-account balance and a stronger greenback, putting strains on the most-leveraged parts of the world’s second-largest economy, he says.…
China will allow overseas central banks to trade in the onshore foreign-exchange market, Premier Li Keqiang said in a keynote speech at a World Economic Forum meeting Thursday.
The nation will keep the yuan stable at a reasonable, equilibrium level, he said. Overseas monetary authorities have already been granted access to China’s interbank bond market, encouraging them to hold yuan-denominated assets in their reserves.
“Not long ago, we allowed foreign central banks to participate in the interbank bond market,” Li said. “The next step is to allow foreign central banks to directly participate in the interbank foreign-exchange market. Before the end of this year, we will complete the cross-border yuan payment system that facilitates the development of the offshore yuan market.”…Bloomberg News
