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Year of the yuan: China's explosive currency goes global

Thu, 02 May 2013 12:26:08 GMT

The ‘people’s currency’ of China is redefining the global economic monetary system. The closed-capital pariah is blossoming into a reserve standard and is hedging appeal against the indebted dollar and the untested euro, piquing foreign interest.

Degenerating credit quality across the board has prompted asset managers to shy away from the dollar, euro, Japanese yen, British pound, and Swiss franc. And some are turning to the yuan, a currency that 10 years ago was completely off limits to foreign investors.

An HSBC forecast projected that by 2015, the yuan will become one of the three most used currencies in global trade, in league with the dollar and euro. The report, issued in April, also foresees a third of China’s cross-border transactions being carried out in yuan.

China has been making a concerted effort to establish itself as an international currency reserve. China already has agreements with Russia, Vietnam, Thailand, and Japan allowing trade to be settled in yuan instead of dollars.

As China launches its global currency, European financial centers are hoping to become Europe’s yuan hub. London, Paris, and Zurich have all made very vocal bids for this title. According to Bloomberg, the Bank of England has an inside track to be the first Group of Seven nation to sign a currency-swap with the People's Bank of China. The deal may grant the UK central bank as much as 400 billion yuan ($64 billion) in reserves.

Many national banks are switching over to the yuan to diversify their reserve currencies, Australia the most recent to join ranks with the world’s second largest economy. The Reserve Bank of Australia announced in April it will transfer 5 percent of its foreign currency reserves ($2.1 billion) into Chinese bonds, deepening ties with its Pacific neighbor and biggest trade partner, and reflecting a global shift to the yuan.

The move is an “important milestone in deepening our financial and economic linkages with China,” Australia’s Treasurer Wayne Swan said in an emailed statement to Bloomberg. China and Australia are major trading partners, so an investment in Chinese currency reserves will benefit transactions between the two countries. Now, they can conduct business transactions directly from yuan to Australian dollar, cutting out the middle man, the US dollar or euro.

The Chinese yuan is the 13th most-used currency in the world for international payments, according to a February 2013 report by the Society for Worldwide Interbank Financial Telecommunication (SWIFT). It jumped 6 places from the previous year.

SWIFT reported that the value of payments in yuan soared $171 year-on-year in January, or 24 percent. The yuan has surpassed the Russian rouble and the Danish krona in international transactions. Close behind are the South African rand and the New Zealand dollar. The euro is the most used currency, followed by the US dollar, and then the British pound.

The debut
The yuan has been dubbed a ‘hermit currency’, isolating itself from foreign investment and setting its own rules, but is now slowly entering world currency markets. “The hermit is ready to come out of its shell and the sooner the better for China to play a major role in the global economy,” said Patrick Young of DV Advisors. Cross-border yuan payments through Singapore rose 30 percent month-on-month in January 2013. Payments through London grew at an even faster pace, at 40 percent, according to the HSBC report.

The top-five currencies for international payments in January 2013 were the euro (40.17 percent), the US dollar (33.48 percent), the British pound (8.55 percent), the Japanese yen (2.56 percent), and the Australian dollar (1.85 percent).

“The Yuan will take its place as a leading global currency, it is not likely to challenge the dollar's hegemony for some time, ” Patrick Young said. In 2012 there was a 900 billion yuan ($145 billion) increase in trade payments, according to The Economist. Only three years ago there were almost zero transaction payments settled in yuan.

“The world's reserve currencies are distributing away from dollar centrality to a broader spread of currencies. To that end the Yuan and indeed the rouble are all likely to take a greater share of global reserves as indeed the economic power of the east expands,” Young added. Recent economic problems linked to the euro and the dollar have set a trend for currency reserve diversification as an alternative, Yaroslav Lissovolik, chief economist at Deutsche Bank in Moscow told RT.

“It is definitely a trend and this trend will continue. There is a global demand for more reserve currencies. The world economy wants to diversify the set of reserve currencies as a way from the volatility and the problems associated with the current reserve currencies, because both the US and Europe are plagued by economic problems. This is natural and clear that the global economy should use more foundations, more columns on which to stand and build a stronger foundation of a more complex global economy,” said Lissovolik.

The numbers are on the rise, but they still pale in comparison to the dollar. The yuan only comprised a 0.63 percent market share of the global currency market as of January 2013. Its ranking is still a minute fraction of China’s export market, the world’s second-largest, after the EU. The dollar, the current market and commodity standard, totals $11 million in currency reserves.

‘Dim sum bonds’
Another pin in the narrative of the yuan is Hong Kong and ‘dim sum bonds’. The yuan hasn’t been officially available for foreign trade, but ‘dim sum bonds’, a bond dominated in Chinese yuan assets and issued in Hong Kong, has allowed foreigners a loophole to invest in domestic Chinese debt. China has set up special administrative regions in Guandong province, Hong Kong and Macau, which operate with their own currencies, but are still closely linked to the Chinese economy.

Hong Kong has long served as a roundabout way to get exposure to China’s closed capital market, but still only equal about 1% of those in mainland China. The offshore status allows foreigners to circumvent the tight currency controls through the financial hub. The more offshore (or ‘onshore’, in the case of Hong Kong) deposits that are out of the control of the PBoC, the less effective the capital controls are.

History of currency manipulation
The yuan hit a 19 year high on April 26 at 6.1616 against the dollar after the PBoC loosened controls on the reference rate to increase investment, as well as an effort towards making the yuan a ‘floating’ currency by 2015. In 2012, the yuan advanced 1 percent against the dollar, but in 2013, it could appreciate between 2.1 percent to 6.1 percent, according to a Bloomberg survey.

China insulates the yuan under strict government controls but has recently taken steps to trim the nation’s reliance on the dollar by establishing demand for their own currency. China severed its currency peg to the dollar in July 2005 after 10 years of a stable, almost unchanging exchange rate.

Before 2009, the central government had prohibited export of the currency and its use as tender in international transactions. By keeping the floodgates of market volatility closed for more than a decade, the value of the yuan has been set at an artificially low level, which in part facilitated China’s 30 year export boom. China enabled its currency to strengthen 21 percent between July 2005 and July 2008, including an inaugural single-day gain of 2 percent.

With almost no international capital flow, the fixed currency safeguarded China from the Asian financial crisis of 1997 and the US banking crisis of 2008 and subsequent world recession. Appreciation efforts were cut off to brave the global recession and climbed 10 percent against the dollar since the state deregulated controls on June 19, 2010. he consensus among politicians and economists alike is that the yuan is expected to ‘float’ in 5 years.

Before the yuan can ‘float’, be dictated by markets and not government manipulation, China will have to restructure its interest rate system, which, currently set by the state, has little maneuverability and range.

If China accelerates the process, implications are bullish. A higher interest rate will slow investment expansion and growth, which will kick back GDP. If the yuan becomes too expensive too quickly, it will hinder export demand, a lifeline to China’s economy which has kept it relatively unscathed from the worldwide recession.

If the yuan rises too quickly, it will also inflate prices, which could force toy, textile, and electronic factories to move inland in search of cheaper labor.

China’s growth has slowed to 7.7 percent in the first quarter, missing the 7.9 percent benchmark of the previous quarter. China must find closely monitor its growth slump in tandem with currency valuation. Because of its export-driven economy, relinquishing full control of the currency in the short-term is highly unlikely.

Source: rt

Currency Positioning and Technical Outlook: Fundamentals Needed to Clarify Charts

Tue, 30 Apr 2013 12:33:24 GMT

Over the past week, sterling, bolstered by news of a 0.3% expansion in Q1 and reduced chances of fresh BOE action before Carney takes the reins in July, was the best performing major currency. A short squeeze in the yen helped it almost match sterling's 1.6% gain against the dollar.

Defying our expectations for more weakness, the Canadian dollar was also among the top performers, helped by a rally in crude oil. The 30- and 60-day correlation of returns (percentage change) between WTI and the Canadian dollar is the highest six months. Crude oil prices were higher six of the past seven sessions.

Looking forward, the bad news is that the technical outlook has been not clarified by the price action in recent days The good news is that there are a number of key fundamental developments in the coming days that will help strengthen or crystallize the underlying trend. These events include the euro area PMIs , the US employment data and the ECB and FOMC meetings.

Our near-term bias is for a stronger euro, but the price action itself has been poor. Technically, we think the euro has put in the first leg of the correction of its nearly 10-cent sell off from early February though early April. The first leg up stalled near $1.32, just shy of the 50% retracement objective (~$1.3230). We suspect there will be another leg up that can extend the recovery toward $1.3350.

The fundamental basis for this is a shift in the news stream. For the past few years, the euro area moves from crisis to resolution to complacency. Since the (at least temporary) resolution of the Cypriot crisis, Europe appears to have moved into the complacency phase and this phase is often supportive of the euro. At the same time we suspect the market has gotten ahead of itself in terms of an ECB rate cut. We suspect that if the market is not disappointed, a sell-the-rumor, buy-the-fact, type of activity may be supportive of the euro even if the ECB does cut the refi rate.

At the same time, the US news stream is poor. Most of the regional Fed surveys and important economic data are being reported weaker than expected. This weakness is seeing discussions of a Fed exit, well, taper off. The Dollar-Index, which is heavily weighted to the euro and currencies that move in the euro's orbit (like the Swiss franc and Swedish krona) is also looking heavy, finishing near its lows for the week.

We have been talking about sterling's potential toward $1.56 for several weeks. Although it has been frustrating, the move above $1.5425 and the new two-month highs seen before the weekend, boost credence in our constructive sterling outlook.

We have argued that the dollar's advance from around JPY76 seen in mid-November was the market pricing in the stimulative monetary and fiscal policy associated the Abenomics. The failure of the dollar to rise above JPY100 has prompted a bout of long liquidation. The greenback appears to be carving out a potential double top. However, the neckline is not seen until the JPY95.80 low seen on April 16. If confirmed, the measuring objective is near the late Feb lows around JPY91. The 38.2% of the dollar's rally since it became clear that Abe would be Japan's prime minister, comes near JPY92.

Japanese markets are closed on Monday and Friday in the week ahead. Japanese exporter and institutional investors have been thought to be the featured yen buyers. While it may be tempting to try to take the dollar higher without Japanese resistance, we suspect that non-Japanese participants may be reluctant to do so given the large short yen positions already held by the short-term momentum and trend following market segment.

The technical condition of the Canadian dollar improved as the greenback was turned away from the CAD1.03 area. It now looks set to test the CAD1.0080-CAD1.0100 area. A break of this band would signal a return to parity. We note that the Commitment of Traders points to a market that is very short the Canadian dollar, though admitted the latest report does not pick up the strength of the Canadian dollar seen in the second half of last week.

Tame CPI figures got many players thinking the Reserve Bank of Australia could cut rates at its May meeting and at least a 40% chance of this has been discounted in the OIS market. Since the sell-off from the near $1.06 level approached near the middle of April, the Aussie has struggled to find much traction The recovery in gold prices and copper prices, both of which the Aussie's correlation with have increased in recent weeks, may help support it, but it needs to resurface above the $1.0320-40 area now to bolster confidence.

We also see that gold has retraced 68.2% of its recent plunge and the momentum seems to have waned as the 20-day moving average has been approached. Copper prices bounced smartly off 18-month lows near $300, but reversed before the weekend from its 20-day moving average and a retracement objective. The close was on the session lows.

The US dollar approached the cap we identified last week near MXN12.40. The price action reinforces the significance of this area. The dollar is will likely continue to be supported in front of MXN12.00. We are concerned that the weaker series of US data and softer Mexican data, coupled with a political scandal that may sap some support for the PRI's reform efforts, may see the peso trade in a broad range in the coming period.

Observations on the speculative positioning in the futures market:
1. There were mostly minor position adjustments in the most recent reporting week. Only the gross short yen positions and gross long Australian dollar positions were adjusted by more than 10k contracts. Gross long positions were generally pared, with Canadian dollar the notable exception. Gross short positions were also mostly reduced. The exceptions were a small increase in the gross short euro position and gross short Australian dollar position.

2. The reduction of more shorts than longs swung the net Swiss franc position to the long side. This is the first time that the net speculative position in the Swiss franc futures has been long in two months.

3. The net short yen position is the smallest since early March. The gross short yen position is the smallest since late January.

Source: zerohedge

Polymer Currency: Waste, Deceit & Commonsense

Mon, 29 Apr 2013 12:53:59 GMT

The concept of moral hazard is defined as a situation where there is a tendency to take undue risk, because the costs are not borne by the party taking the risk.

Apart from the recent IMF advice to wind down AMCON because of the threat of moral hazard, the policies and strategies of government Ministries, Departments and Agencies, particularly those of the Central Bank of Nigeria are fraught with moral hazards. However, in this article, we will discuss the production and adoption of polymer currency notes and coins as an illustration of the odious implications of such decisions.

In an article titled “Polymer Currency: Waste, Deceit and Commonsense” in November 2009, we discussed issues relating to CBN’s misguided currency strategy; a summary of that article is as follows:

After a frustrating and fruitless attempt to spend his cache of coins, Veteran Journalist, Bisi Lawrence, in a piece titled “O to Spray Again” in October 2009, lamented that “I also knew why the coins were, so to say, unmovable; it was because they were in naira denominations, which had practically become without value.

I recall that one Kobo (coin) loaf of bread was enough for breakfast when I was young, and I also remember that young women almost dislocated their wastes while dancing at parties for the joy of being appreciated with a 10 Kobo piece”.

However, Lawrence also recognised the inevitable truth that “we need these coins in our commercial life, because they last much longer than currency notes, and they are so adaptable because they can be (applicable for slot machines) for sundry products”, and he therefore concluded that “we really need to increase ‘their’ value, and there is nothing stopping us”. I couldn’t agree more.

Paradoxically, in denial of Bizlaw’s commonsense observation on the significance of value, the former CBN Governor, Professor Soludo issued, the almighty N1000 note (about $8) in 2006, and later that year, also issued new 50K, N1 and N2 coins into our currency profile because the existing paper forms had become cumbersome and filthy, and were generally rejected by all, including the ‘lowly’ street beggar, because they had no value! Predictably, the fresh-minted coins were equally rejected just like the note forms because they were virtually worthless.

In desperation, Soludo directed without success that all the banks must accept at least 2% coins component in their currency supplies from CBN, while over N10bn of taxpayers’ money expended on a massive enlightenment campaign, still failed to encourage the public to embrace the freshly minted but worthless coins.

In another article in February 2007 titled “Hurray! The Coins are Back, But…”, we noted that “the economic wisdom in coin production is in their long lifespan (over 50 years)… and the initial production cost can be amortized profitably over its lifespan. If however, the coins are rejected because of low value, then, the new coin profile will be rejected.

Ultimately, CBN admitted, three years later, that the introduction of coins was misguided, and consequently withdrew and publicly auctioned them at less than one-tenth of production cost! In October 2009, as if in demonstration that CBN has not learnt its lesson with regard to profligacy with public funds, the N5, N10 and N50 denominations introduced as new paper issues in late 2006 were again reissued on much more expensive polymer material!

The introduction of these imported N5, N10, N50 polymer notes in addition to the existing N20 note of same fabric, definitely ran counter to the canvassed merits of security and the cost effectiveness of committing billions of naira to upgrade the CBN-controlled Nigeria Mint and Security Company!

Again, what a waste and loss of job opportunities for some of our countrymen! Incidentally, (see Punch editorial 8/10/2009) Securrency, the Australian beneficiary printing company has lately been accused of giving bribes of over US$6m to the proxy of some top Nigerian government officials to win the 2006 polymer notes contract.

Nonetheless, the alleged superiority of these polymer notes were extolled in CBN publicity campaigns as being “user-friendly; look better and remain crisp over a long period; do not stain, rumple or tear easily”. CBN also claimed that “polymer notes will save the nation huge sums of money used for reprinting”.

However, the actual experience of Nigerians, as noted in our article “The Putrid Mess Also in CBN – 3” of 28/09/08, is that polymer notes fade and peel easily, especially when they are wet or folded, and they shrivel with heat contact.

Paradoxically, In April 2013, Dr. Tunde Lemo, a CBN Deputy Governor, confirmed that the apex bank would once more scrap these polymer notes, because their poor quality contradicts the result of CBN’s earlier research that polymer notes were superior to paper notes.

Lemo also confirmed that the contract for the printing of new paper notes has been awarded once again to another foreign company because of the unexpectedly limited capacity of the ‘modernized’ Nigeria Minting and Printing Company! Inevitably, billions of naira will once again be wasted in promoting public acceptance of paper note denominations, which will again fail to fulfill the functions of primary kobo coins.

As before, CBN is once again in denial that currency acceptability is primarily a function of value; for example, the erstwhile worthless Ghanaian primary pesewa coin (similar to kobo) has become desirable for transactions and change since Ghana’s Central Bank redenominated/redecimalised their currency to give the cedi, more value. Nigeria will inevitably have to follow suit, if Bisi Lawrence’s hope of ever spending kobo coins is to materialize.

Regrettably, no one in CBN or elsewhere has been sanctioned or penalized for the odious impact of these haphazard decisions on our currency profile, and our prostrate economy.

Source: vanguardngr

Scottish currency options: not a simple matter

Tue, 23 Apr 2013 14:44:04 GMT

Those pressing for a yes vote in next year's referendum on Scottish independence need to convince voters that the country will prosper under a new currency and macro-economic regime. This will prove difficult, not because the current system is perfect but because all options have drawbacks.

A Treasury paper published puts the case for the status quo. Although some in Scotland might cavil at the claim that the UK is one of the most successful monetary, fiscal and political unions in history, first minister Alex Salmond understands the sensitivity of this issue. That's why the SNP favours continuing to use sterling in a formal currency union if the referendum goes its way.

This is one of the options picked apart by the Treasury. It would not be a simple matter of Salmond choosing to have a formal currency union; David Cameron would have to agree to it, too. And London would certainly impose stringent monetary, fiscal and banking conditions in an attempt to prevent spillover risks to the rest of the UK.

Scotland could opt to use sterling without a formal agreement, akin to the way in which some Latin American countries such as Ecuador use the dollar. This involves a considerable loss of autonomy, as does the third option – joining the euro. Indeed, the only truly independent route would be a new Scottish currency run by a central bank in Edinburgh, but the experience of small countries suggests that this can be a bumpy ride.

Source: guardian

Bitcoins: The yo-yo currency

Thu, 11 Apr 2013 10:15:36 GMT

IT'S a currency tied to no country or central bank, but it's also wildly unstable, if overnight trading is anything to go by. Bitcoins, a virtual digital currency that you won't find minted on plastic, paper or metal, wildly fluctuated in value overnight in a sign of its risk and volatility. Its value has surged more than 1000 per cent from about $15 to just shy of $170 since the start of the year. But overnight it shot up as high as $266, and crashed to as low as $105.

The $266 peak represents a record high, while the $105 low as a 60 per cent drop. That's huge. It eventually stabilised to just below $200. All in all, not too shabby for an online currency launched by an anonymous computer programmer amid the fallout of the global financial crisis in 2009. The goal was to create a non-fiat currency that could not be devalued by governments or central banks. Though the currency has sparked a trading frenzy, or a "mania phase", analysts warn the bubble may burst.

Jesse Colombo of TheBubbleBubble.com believes the price will eventually return to around $15. But for now, many are enjoying the bubble. A US citizen reportedly purchased a used Porsche Cayman last month using 300 bitcoins. That's a far cry from what has been dubbed the most expensive pizza purchase in history when in May 2010 a US programmer swapped 10,000 bitcoins - then worth less than a cent each - for two pizzas. At Tuesday's price the pizzas cost him about $1.7 million.

Source: adelaidenow

Dollar drops after downbeat U.S. manufacturing data

Wed, 03 Apr 2013 09:24:11 GMT

The dollar fell against other major currencies Monday after a U.S. manufacturing report for March came in weaker than expected, raising concerns about slowing growth in the sector. The dollar’s weakness came in a quiet market following the Easter holiday weekend while European markets were closed. The euro bought $1.2847 around 2100 GMT, up from $1.2818 at the same time late Friday.

The dollar fell against the Japanese currency, to 93.27 yen from 94.20 yen late Friday, while the euro dropped to 119.82 yen from 120.68 yen. The Institute for Supply Management said its U.S. manufacturing index fell to 51.3 in March from 54.2 in February, reflecting growth for the fourth straight month but at a slower pace. “The dollar weakened against all of the major currencies after the ISM index dropped,” said Kathy Lien of BK Asset Management.

“The deterioration was more significant than anticipated and raises concerns about the pace of recovery in the manufacturing sector.”Lien said that all eyes would be on the European Central Bank’s monetary policy meeting this week. “The ECB is widely expected to keep monetary policy unchanged but with German data weakening and Cyprus requiring a bailout, the ECB could be warming to the idea of additional stimulus,” she said.

David Song of DailyFX highlighted the possibility of an interest rate cut. “As the fundamental outlook for the region turns increasingly bleak, the ECB remains poised to strike a dovish tone for monetary policy, and we may see a growing number of central bank officials show a greater willingness to push the benchmark interest rate to a fresh record-low as the recession threatens price stability,” Song said. The dollar dropped against the Swiss currency, to 0.9466 francs from 0.9488 francs late Friday, and weakened against the British pound, which fetched $1.5232 compared with $1.5191.

Source: ticotimes

Australian SMEs embracing China’s currency

Tue, 02 Apr 2013 07:21:30 GMT

Corlette Designs opened an office in Shanghai last May. The Sydney-based agency that specialises in signage, graphic design and branding for the hotel and commercial industries wanted to cut costs for its Australian and Chinese clients by locating some production and technical functions in China.

Registering a local company also allowed Corlette Designs to issue invoices in yuan. It had been operating in China for four years and had been invoicing clients in US dollars. “This was a massive breakthrough,” creative director Camille Corlette says. “It’s really seen very favourably by our Chinese clients. For them to be able to pay an international consultant with international creativity in their own local currency was a huge win for them.”

Revenue from China-based clients has grown 50 per cent since May to make up about half of the company’s revenue, which Corlette expects to reach $5 million next year. The growth is more a consequence of word-of-mouth referrals that have seen Corlette’s China projects expand over the past four years from individual hotels to large mixed developments, but making her services easier and cheaper for Chinese clients to pay for no doubt plays a role as well.

Smaller Australian companies have been quicker than larger ones at adopting the yuan as a method of payment, HSBC says. Just 1 per cent of Australia’s trade with China has been settled in yuan since 2009, when it became an international trade currency – despite 10 per cent of China’s trade being settled in the currency last year alone – showing bigger businesses have been slow to adapt, the bank says.

By contrast, a survey by the bank of more than 500 Australian SMEs indicates that of those trading with China, 31 per cent plan to use both US dollars and yuan to settle trade transactions and an additional 13 per cent will exclusively use yuan over the next 12 months.

Being able to pay in yuan means Chinese clients don’t bear the currency risk of buying dollars. Corlette says her company minimises the risk of currency fluctuations by buying forward contracts. “Businesses still need to recognise and exploit the opportunities presented by the growing international presence of the renminbi [yuan],” says HSBC Bank Australia’s business banking head Paul Edgar.

There are still grounds for caution, however. HSBC’s own research puts the daily global turnover of yuan at 60 billion ($9.1 billion), a fraction of the $US3.2 trillion traded each day globally and ranking behind the Swedish kronor, Hong Kong dollar, Canadian dollar, Swiss franc, Australian dollar (about $US250 billion-worth), British sterling, yen, euro and US dollar.

Peking University-based finance professor and former investment banker Michael Pettis thinks there’s a lot of hype about the internationalisation of the yuan. “The impact is not going to be nearly as great as people think, at least for the next several years,” Pettis says. “There will certainly be significant growth in the use of the renminbi, but it would take a huge amount of growth simply for it to become a minor currency.”But for smaller companies it can be a good option. Melbourne-based Studio 505, an architecture business with 25 professionals, now bills clients in yuan for projects in China.

But in early 2010, in an attempt to hedge its foreign currency exposure, it opened both Singaporean dollar and US dollar accounts. The Aussie’s subsequent relentless rise lost the firm more money than director Dylan Brady anticipated. So the next year he closed the accounts and now payments are made through a foreign exchange company that has accounts in both countries and pays into the company’s Australian account. “When money comes in from overseas, we convert it at whatever the day rate is,” Brady says.

Source: brw

US concern on China currency fades as yuan grinds higher

Wed, 13 Mar 2013 10:30:04 GMT

WASHINGTON: After years of grabbing the spotlight in US-China economic relations, US concerns over the value of Beijing's currency appear to be fading, giving ground to newer issues like cyber-security and trade secret theft.

Some lawmakers continue to argue a weak Chinese yuan is robbing jobs from the United States.
But action to force a change is unlikely and the issue will probably remain on the back burner as long as the US economy continues to improve.

An increase in the value of the yuan, a big drop in China's global trade surplus and a rise in labor costs that has made Chinese products less competitive have conspired with a pickup in US job growth to take the wind out of Washington's sails.

On top of that, the United States has faced fury from other countries for an aggressive easing of monetary policy that critics contend seeks to drive down the dollar, a charge that puts Washington in a tough spot to criticize China.

"China's currency regime has ceased to be a flash-point in US-China economic relations," said Eswar Prasad, senior professor of trade policy at Cornell University and a former International Monetary Fund official.

Prasad says the US administration has shifted its attention to issues such as increased market access for US manufacturing firms and financial institutions that want to do business in China, and better protection of intellectual property rights. US President Barack Obama, attacked during the presidential campaign by challenger Mitt Romney for failing to label China a currency manipulator, did not even address the issue in his recent State of the Union speech.

But he came out swinging on cyber-security concerns in remarks seen directed at China. "We know hackers steal people's identities and infiltrate private e-mail. We know foreign countries and companies swipe our corporate secrets We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy," Obama said.

CONGRESSIONAL ROADBLOCK
In recent years, both the US House of Representatives and Senate have passed bills to give Obama new tools to push China into letting the yuan rise faster in value, but neither made it all way to his desk to sign into law.

The latest legislative effort was stopped dead in its tracks by House Speaker John Boehner, an Ohio Republican, who said he feared it would start a trade war. Boehner's opposition and the yuan's strengthening has drained energy in Congress to deal with the issue, said one congressional aide who has worked on the issue for years. US preoccupation with its own fiscal problems also may have helped push China off the US political agenda, said Nicholas Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics.

"But I hope the most important reason is that China has allowed their currency to appreciate a significant amount, and more importantly their (trade) surplus, as measured by the current account, has come down quite dramatically," Lardy said. Since mid-2010, China's exchange rate, adjusted for inflation rates in the United States and China, has risen 16 percent against the dollar, according to the US Treasury.

At the same time, China's current account surplus, the broadest measure of its trade with the rest of the world, has fallen from a peak of 10.1 percent in 2007 to a preliminary reading of 2.6 percent in 2012.
That makes it hard for Washington to continue to argue the yuan is significantly undervalued, even if the US trade deficit with China grew to a record $315 billion last year.

Phillip Swagel, a former Treasury official now at the American Enterprise Institute, said the US Federal Reserve's extraordinary easing of monetary policy is yet another factor cooling Washington's appetite for criticizing Beijing.

"This makes it harder for American officials to criticize other countries," Swagel said. During last year's presidential contest, Romney blasted Obama for repeatedly deciding not to label China a currency manipulator in a semi-annual Treasury Department report, and promised if elected he would do that on "day one."

But in one measure of the low temperature in Congress now on China currency, new US Treasury Secretary Jack Lew faced only a couple mild questions on the issue during his Senate Finance Committee confirmation hearing last month.

Lew said he believed the yuan was "still undervalued." But he sidestepped a question from Senator Sherrod Brown, an Ohio Democrat, on whether the United States should slap anti-subsidy duties on goods from countries with undervalued currencies as a Senate bill passed in 2011 Later, in a written response to a question from Senator Orrin Hatch, the Finance Committee's top Republican, Lew said "addressing China's exchange rate would be a top priority" and promised to work with Congress on the issue, but he carefully avoided endorsing the 2011 Senate bill.

CAREFUL APPROACH
That carefully calibrated approach is in keeping with the US tack through the first four years of Obama's administration; it never threatened to veto China currency legislation but also offered little or no public support. Instead, it preferred to press China diplomatically during presidential summits and other high-level meetings. After four years, it can point to progress.

The IMF, in its first published estimate in July 2012, said China's yuan was undervalued by 5 percent to 10 percent, much less than 25 percent to 40 percent figures touted by many lawmakers for years. Critics say that was a politically derived estimate since China is a powerful voice on the IMF board. But since then, the yuan has risen further against the dollar and senior Chinese officials last week promised further reforms to allow more exchange rate flexibility. Altogether, the yuan has appreciated 31.6 percent on a trade-weighted, priced-adjusted basis against major trading partners since July 2005, when it embarked on currency reforms, according to US Treasury Department calculations.

Also, while China still holds trillions of dollars in US Treasury bonds, bought with proceeds from export sales as part of Beijing's effort to manage its currency it has dramatically scaled back its purchases.
"They are no longer intervening very much in the foreign exchange market," Lardy said. "The criticism in the past was the intervention prevented the currency from appreciating.""Now the intervention is at such a modest level, you can make the argument the exchange rate is much closer to an equilibrium rate than it was a few years ago."

Source: brecorder

China will not join currency war

Mon, 04 Mar 2013 18:01:28 GMT

As major developed economies further loosen monetary policies to devalue their currencies and boost exports, Asian and Latin American countries have had to take countermeasures to prevent sharp appreciation of their currencies and to protect their interests. A global currency war has started.

The currency war has increased the risks of imported inflation, shrinking foreign exchange reserves, deteriorating foreign trade environment, and hot money influx, and made it more difficult to conduct financial regulation and implement industrial policy.

Printing money like crazy
The currency war is a condition where countries compete against one another in manipulating the value and supply of their own currency in order to maximize their interests. Sun Huayu, a professor at Jinan University's International Business School, said the ongoing competitive devaluation can be described as a currency war, but the move actually aimed at reviving the domestic economy rather than starting a currency war.

The United States has been printing money like crazy and launched several rounds of quantitative easing since the subprime mortgage crisis erupted in 2007. This is the root cause of the ongoing currency war.

“Given the large size and great openness of the U.S. economy, U.S. domestic policies have a strong spillover effect, and can cause inflation and capital bubbles in other countries through trade and capital flows. If the bubbles burst, financial crises will occur,” Sun said.

Furthermore, the new Japanese prime minister has reiterated that Japan will further loosen its monetary policy to get the domestic economy out of deflation. The European Central Bank, Bank of England, and other Western central banks have then followed suit to announce they will adopt more active monetary policies to stimulate economic growth, leading to greater tension worldwide. In order to protect their own interests, Brazil, South Korea, Israel, Switzerland, and other countries have had to take strong measures to prevent excessive appreciation of their currencies.

However, Christine Lagarde, managing director of the International Monetary Fund (IMF), said that worries about the currency war are unfounded. Angel Gurria, secretary-general of the Organization for Economic Co-operation and Development (OECD), also said there is no currency war.

Sun noted that the two institutions brushed off talk of the currency war because they are political allies of developed countries, and stable economies in developed countries serve their interests. If the currency war was started by China, they would have criticized China bitterly.

Will China join the currency war?
Who will benefit from the currency war? Sun believes that the country that first devalued its currency obtained some benefits, but its policy damaged the interests of other countries and resulted in competitive devaluation. At last, a currency war occurred, disrupting international trade, investment, and monetary systems and harming all countries involved.

“China is unlikely to join the currency war!” Sun said. China opposes the policy of quantitative easing adopted by the United States and Japan, and all of its macro-control and monetary policies are aimed at promoting domestic economic development. The yuan is not an international currency yet, so China’s monetary policy has little spillover effects.

Although China will not join the currency war, widespread quantitative easing has produced many negative effects on China. Sun noted that the overly loose monetary policies of developed countries have led to massive flows of cheap capital into emerging market economies as well as a large influx of international hot money into China. This has caused a large number of financial asset bubbles, and made it more difficult to conduct financial regulation and implement industrial policy.

Furthermore, excessive liquidity brought about by widespread quantitative easing has placed China under heavier pressures of imported inflation, shrinking foreign exchange reserves, and deteriorating foreign trade environment.

Source: english.peopledaily

Colombian Currency Extends Weekly Decline on Coal Export Concern

Sat, 02 Mar 2013 10:11:07 GMT

Colombia’s peso posted its biggest weekly drop since October amid concern that an interruption of coal exports will reduce the flow of dollars into the country. The peso depreciated 0.8 percent 1,812.75 per U.S. dollar this week, pushing its decline in 2013 to 2.5 percent. The currency ended today’s session little changed.

“Coal is Colombia’s second-biggest export so what’s going on has a big impact not only in terms of exports but on economic growth,” Daniel Escobar, the head analyst at Global Securities brokerage, said in a phone interview from Bogota. A report showing a manufacturing slowdown in China reduced demand for higher-yielding assets, hurting the peso, he said.

Workers declared a strike Feb. 7 at Cerrejon, Colombia’s biggest coal mine, in a dispute over wages an benefits. A day earlier, authorities suspended the port operating license of Drummond Co., the country’s second-biggest thermal coal producer, after it dumped a mix of water and coal into the sea. Colombia lifted the three-week ban today.

The peso probably won’t weaken much further beyond 1,820, Barclays Plc economist Sebastian Brown wrote in a report today. The currency will “appreciate mildly” over the next three months, he wrote.
Yields on peso bonds due in 2024 fell two basis points, or 0.02 percentage point, to 4.99 percent, according to the central bank. The yields declined to 4.97 percent on Feb. 22, the lowest since the securities were issued in 2009.

Source: bloomberg