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RMB Exchange Rate
BUSI 3001 SBLC
Week 11(12) Fall 2016
Charles Mo & Company
November 21, 2016
Content/Agenda
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RMB exchange rate
Latest development on RMB currency
Similar trends between the Chinese Yuan and the
Japanese Yen
Which country has the right strategy on currency
policy?
Great Currency Debate
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Complaint from Congress to President Bush. Under valued
Yuan contributes to:
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US trade deficit
Lost jobs in the US
Suppress US economic growth
Is undervalued RMB having effect on US economy?
Congressional attempts to legislate Chinese currency
Is China a currency manipulator?
China’s new exchange-rate policy effective in 2013
China and US economic relations
China Banking Reform
Acronym
Historical Chart of the RMB Exchange (Chinese Yuan) vs
USD
49-76 76-89
90
95
00
01
02
03
04
05
06
07
08
09
Mao
Era
5
8.5
8.3
8.3
8.3
8.3
8.3
8.0
7.5
7.3
7.0
6.8
10
11
12
13
14
15
16
6.6
6.4
6.2
6.09 6.15 6.1
1
6.8
5
Deng
Era
RMB Surprise Movement
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January 26, 2014 1$ = RMB 6.049 highest
exchange rate since 1995.
Since January, 2014, however, RMB reversed its
rising trend and devalued.
March 21, 2014 1$ = RMB 6,20
May 10, 2014
1$ = RMB 6.227
November 21, 2016 1$= RMB 6.887
Reasons behind the surprise RMB
decline
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One possible reason is the tapering of the US Feds
purchasing of the Treasury Bonds.
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Before borrowing at a lower US interest rate to buy the
high yield Chinese assets
Now the logic is reversed. Therefore, demand for the
Chinese assets declines and accordingly demand for the
Chinese Yuan.
In reality, the PBoC controls the direction of the
Yuan
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One possible reason is PBoC is ready to relax the free
exchange of the Yuan, but needs to show the
speculators that trading of Yuan could be both ways,
both ups and downs.
China’s creation of AIIB (Asia Infra structure
Investment Bank)
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Formation 24 October 2014
Type Regional organization
Legal status Treaty Purpose
Crediting Headquarters Beijing, China
Region served Asia
Membership 57 (2015-04-15 UTC+8 12:00)
Secretary General Jin Liqun
Website aiibank.org
Yuan
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US influence in the financial world
China’s success at signing up so many countries
as founders of the new Asian Infrastructure
Investment Bank
What is China’s strategy on its currency?
Does China want its currency to be a reserve currency or
an alternative to the US dollars?
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The U.S. accounts for just 18% of world economic
output, but 43% of all cross-border financial
transactions are denominated in dollars, as are 63%
of known global central-bank reserves.
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Bretton Woods System
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Creation of IMF
Established rules and regulations in foreign currencies
exchange
Tied the currency exchange to gold standard
US, UK, West Germany, France, Japan
Plaza Accord
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Systematically to devalue the USD against the Yen
and the Mark
Believed to have led to Japan’s assets bubble in the
80’s and thus the so called lost decade
RMB inclusion in the IMF SDR Basket being reviewed
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Currencies included in the IMF SDR Basket
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China has been pushing for the inclusion of RMB in
the IMF SDR basket since 2009
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US dollar, Japanese Yen, Great British Pound and Euro
little tangible and immediate economic benefit for China
no country would manage foreign exchange reserves
modeled by the SDR
The British government supports the inclusion, but
the US has reservation
Requirement for a currency to be included in the
basket
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Size of the country’s export
Whether the currency is freely usable
US influence hinges on Future of Yuan
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Why is the US dollar so influential?
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Not every country needs the IMF or trades with the U.S.,
yet every country needs access to the global financial
system, and that system largely transacts in dollars
During the financial crisis it was the Federal Reserve, not
the IMF, that acted as the world’s lender of last resort,
printing and lending trillions of dollars to cash strapped
foreign banks
US $ has earned to be a reserve currency
Once the yuan becomes an alternative to the dollar, rules
of the game begin to change,
RMB valuation
IMF declares RMB no longer undervaluedThe International Monetary Fund (IMF)
has declared that China's currency, the yuan, is no longer undervalued in light of
gains against many currencies aside from the dollar in recent
months, Reutersreported, citing a statement from the fund. "Our assessment now is
that the substantial real effective appreciation over the past year has brought the
exchange rate to a level that is no longer undervalued," the IMF said. It also called on
China to achieve a floating exchange rate for the yuan within 2-3 years, and
encouraged quicker reform of state-owned enterprises.
In 1990, Japan was on track to become the #1 economy
in the world
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1950-1970 8.4%
annual per-capita
1970-1990: 3.4%
annual per-capita
Hi
growth
rate
Large trade surpluses
1971 360 Yen = 1
US$
1973 300 Yen = 1
US$
Value of Yen rising
1990 130 yen = 1
US$
2012 78 yen = 1
US$
per cap GDP higher than that of
2015 115 yen =,Adjusted
1
the US
US $
Japanese Yen Historical Chart
http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=%2fjpyusd&CP=0
&PT=11
NIKKEI - Bubble Burst
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1985
1989
1992
2009
2011
2012
2013 (5/13)
2014 (5/10)
12,000
39,000
16,000
8,700
8,400
9,547
14,843
14,199
2015 (5/15)
19, 732
After 1991, Japan stopped growing. Average per
cap growth is 1.0%
Most Japanese do not see this as a crisis; Japan is
still a wealthy, high-tech society, albeit with weak
In 2012, China was estimated to become the #1 economy
in the world
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1990-2000 11.4% annual
per-capita
2000-2012: 9.4% annual
per-capita
2009
2010
2011
2012
2013
1971
1973
1990
2012
2013
-$228 b
-$273 b
-$295 b
-$316 b
-$319 b
Hi
growth
rate
Large trade surpluses
Value of Yuan rising
N/A
= 1 US$
N/A
= 1 US$
8.5 RMB = 1 US$
,Adjusted per cap GDP higher than that of
6.2 RMB = 1 US$
the US
6.1 RMB = 1 US$
China GDP annual growth rate
Which country did the right thing on the
currency policy?
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Japan
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In 2014, Tokyo’s debts to GDP ratio is 350%
Tax revenues failed to cover half the spending
Economy has been stagnant for two decades
Dysfunctional banking system
Bad fiscal and monetary policy
Trade surplus country
Homogeneous democracy
Yen appreciated 300% against the $ since 1972
US
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2013, Total public debts to GDP is 78%
http://www.bea.gov/iTable/iTable.cfm?ReqID=70&step=1&isuri=1&acrdn=1
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Projected budget deficit for 2014 us 899 billion.
Economy grew 2.6 % in 34th quarter 2013
Banks are making money and the poor get poorer
Loose monetary policy, inflation, and stagnant economy
Trade deficit and debt deficit country
Diversified democracy
$ lost an average of 25% since the financial crisis in 2008
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China
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Debt to GDP 40% in 2014
Budget deficit under 3% of GDP
Economy grew 7.0% in 2014
Second largest economy in the world
Monetary policy is tightening, but lending is robust and bank
reserve ratio highest in the world 20%
Still an export dependent country
Authoritarian government
RMB strong and pressured to appreciate
Letter of complaint on China’s
Undervalued Yuan
( From: Great Currency Debate)
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15 of the 24 Democratic members of the
powerful House Committee on Ways and
Means sent a letter to Former President
George W. Bush on March 26, 2008
n China’s undervaluation of the yuan
makes US exports to China more
expensive and Chinese exports to United
States cheaper
n Contributing to mass US trade deficits
n Suppression of US economic growth
Does an undervalued RMB contribute
to the US China trade deficit?
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Cheaper RMB:
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Encourage direct foreign investment to China
Transfer manufacturing jobs to China
Manufactured goods tend to go overseas, thus exports
because of cheaper products
More exports, more trade deficits
China’s foreign exchange reserve grew from $711
billion in 2005 to $7.29 trillion in 2012.
What are the implications on the country’s foreign
exchange reserve if the foreign currency held in the
reserve depreciates?
Undervalued RMB claimed to “contributes” to
the US trade deficit
Year
US Exports
US imports
US trade
balance
1980
3.8
1.1
2.7
1985
3.9
3.9
0
1990
4.8
15.2
-10.4
1995
11.7
45.6
-33.8
2000
16.3
100.1
-83.8
2001
19.2
102.3
-83.1
2002
22.1
125.2
-103.1
2003
28.4
152.4
-124.0
2004
34.7
196.7
-162.0
2005
41.8
243.5
-201.6
2006
55.2
287.8
-232.5
2007
65.2
321.5
-256.3
2008
71.5
337.8
-266.3
2009
69.6
296.4
-226.8
2010
91.8
364.9
-273.0
2011
103.9
399.3
-295.4
2012
110.6
425.6
-315.0
2013
122.0
440.4
-318.4
2014
http://www.census.gov/foreign-trade/balance/c5700.html
Chinese Currency Manipulation is not the direct cause to
trade deficit
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The reality is that the value of China’s yuan in terms of dollars is not the
major reason why China exports over three times as much to the U.S. as
American companies do to China. Its exchange rate is a minor source of
weak U.S. job growth.
If currency is the determining factor in trade deficit, these rates do not
correspond with the trade deficit increase:
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From 1995 to 2005, China pegged its currency, holding it steady at slightly over eight yuan to the
dollar. The dollar-yuan exchange rate did not change from 1995 to 2005, and during this period
China’s export to the U.S. increased sixfold, or at a rate of about 19.6% per year.
In late 2005, China allowed its currency to appreciate relative to the dollar until July 2008. Then,
from 2005 to 2008, the value of the yuan relative to the U.S. dollar appreciated by about 21%.
China’s currency was “stronger” and its exports in dollars were more expensive—so Chinese
exports to the U.S. should have fallen. Instead, China’s exports to the U.S. continued to grow at
about the same pace, averaging 18.2% per year.
The rate held steady again for the two years following that date at 6.8 yuan to the dollar. During the
recent recession, dropping by about one-third from late 2008 to early 2010.
In 2010, gradual appreciation occurred again. The current exchange rate now stands at about 6.0
yuan per dollar,
If currency movements were the key factor in determining trade patterns,
one would expect that exports to the U.S. from China could bear a
strong relation to currency movements. They have not.
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But China’s choice of exchange rate
policy is not the source of China’s export
growth. Disappointing job and wage
growth in the U.S. has much more to do
with its own economic policy than with
the value of China’s currency.
Undervalued RMB claimed
“contributes” to the US job losses
US Unemployment Rate
http://www.tradingeconomics.com/united-states/unemployment-rate
Does China Exchange Policy indirectly affect US
Loss of manufacturing jobs
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US productivity gains resulted in job losses
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3.3 m jobs loss from 83-02 in low and mid skilled jobs
1.2 m job gain, up 37%
98-07 US share of global manufacturing output rose
from 22.3 to 24.7% with a smaller workforce (US Bureau
of Economic)
China’s share is 11.4% (UN Ind. Develop. Organization)
Undervalued RMB
“contributes” to
suppression of economic
growth appears to be
misleading
China’s new exchange-rate policy
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the RMB appreciate since the spring of
2005,
RMB pecked to a basket of foreign
currencies
Chinese authorities have again linked the
RMB to the dollar, since June 2008
Sentiment is that Yuan should devalue
2013 China Policy’s Mixed
Results
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Chinese policy makers excel at promising all the right
things. Implementation is another matter.
People’s Bank of China, which has pledged to rein in
credit growth and interfere less with the yuan exchange
rate.
n New financing issued in the fourth quarter was down
17.9% from a year earlier, reversing huge growth
earlier in 2013.
n the stock of outstanding financing still rose by 18.8% in
2013, according to estimates by Bank of AmericaMerrill Lynch. That exceeds the nominal grossdomestic-product growth of about 10%, meaning the
ratio of debt to GDP continues to rise.
On the exchange rate,
Continued
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Foreign-exchange reserves rose by $324 billion in
the second half. China now holds $3.8 trillion,
Administration View on Chinese
Currency
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Bush was against currency legislation,
but Obama has changed the
administration’s position but caution on
currency legislation(07_10_2011_006 Obama
urges caution on RMB bill)
Obama not to label China a manipulator
of currency
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RMB is undervalued
China has taken steps to rebalance the economy
Allowing RMB to appreciate
Passed the 585 b stimulus program
China’s currency continued to rise while other
currencies have fallen
Risen 16.6% from June, 2008 to February, 2009
Since 2009, RMB is stable
China and US economic relations
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China has expressed concerns in the US
Treasury bills.
China owns 1.2 trillion in US Treasury
bills
US relies on borrowing from the Chinese
Obama administration officials have
sought to reassure the safety of the US
assets
During the presidential campaign, Obama
was among the toughest critics of China
manipulating the currency
Treasury secretary, Geithner during the
Critics of China RMB policy
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Senator Charles Schumer, one of the
China’s toughest critics in Congress
Senator Lindsey Graham, long a critic of
China’s currency practices
What will be affected of an appreciation in
RMB
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Chinese Economy
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Inflation
Interest
Real Estate
Export
Import
GDP growth
Unemployment
American firms investing in China
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Value of investment
Import
Finances
Biggest Four Banks in China
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Bank of China (BOC)
Industrial and Commercial Bank of China
(ICBC)
China Construction Bank (CCB)
Agricultural Bank of China (ABC)
1983-84
spins off four major state-owned banks (the Big
Four)—the Bank of China, Industrial and
Commercial Bank of China, China Construction
Bank (CCB), and Agricultural Bank of China—from
the People's Bank of China (PBOC).
1994
reorganizes the Big Four into commercial banks to
be operated on a profit-and-loss basis.
China also establishes three policy banks—China
Development Bank, Export-Import Bank of China,
and China Agricultural Development Bank—to
perform policy-lending functions.
1995
The PRC Law on the PBOC allows PBOC to act
only as a central bank, overseeing China's
monetary policy and regulating the entire financial
sector, rather than carrying on commercial banking
1996
China permits the establishment of Minsheng
Bank, China's first publicly traded, largely private
bank
2001
joins the World Trade Organization (WTO) and
promises to open its banking sector gradually to
foreign firms by December 11, 2006.
2003
China amends the PRC Law on the PBOC and
the PRC Commercial Banking Law to establish
the China Banking Regulatory Commission
(CBRC) to oversee and regulate the banking
industry.
Under China's WTO commitments, the country is
scheduled to fully open its banking sector to
foreign banks by December 11.
2006
Acronym
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IMF = International Monetary Fund
SDR = Special Drawing Rights
AIG = American International Group
RMB= Ren Min Bi (人民币)
WTO = World Trade Organization
GATT = General Agreement on Tariffs and
Trade
Internet/Web companies offering money market
fund
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Chinese technology giants including Alibaba and Tencent are taking on traditional
banks by offering investment products with higher yields than bank deposits soaking
up tens of billions of dollars’ worth of investor money.
Chinese commercial banks deposit rates ranges from 3.5% to 5%
Alibaba and Tencent offer 7% and higher rates for investment products.
Chinese deposits total $7.59 trillions
Alibaba started a money market fund in summer of 2013 and in mid January 2014
totals 45 million depositors and $40 billion.
Regulator such as the People’s Bank of China is unsure as how to regulate this new
investment trend.
Expected that if these internet financing products are unsuccessful, the regulator will
step in to stem its growth. If the products are successful, the commercial banks will
force the regulator to step in in the name of fair play.
Chinese technology giants offer investment products
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Capital Account Convertibility or CAC is a monetary
policy that centers around the ability to conduct transactions of
local financial assets into foreign financial assets freely and at
market determined exchange rates.[1] It is sometimes referred to
as Capital Asset Liberation.
In layman's terms, it is basically a policy that allows the easy
exchange of local currency (cash) for foreign currency at low
rates.[citation needed] This is so local merchants can easily conduct
transnational business without needing foreign
currency exchanges to handle small transactions.[citation
needed] CAC is mostly a guideline to changes of ownership in
foreign or domestic financial assets and liabilities. Tangentially, it
covers and extends the framework of the creation and liquidation
of claims on, or by the rest of the world, on local asset
and currency markets.[2]