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September 23, 2005

The Chinese Central Bank Back In Action (Sort Of)

From MarketWatch:

China's central bank has widened the yuan's trading band against the euro, yen and Hong Kong dollar, another step toward currency flexibility ahead of weekend finance meetings expected to bring some heat on the Chinese leadership.

The People's Bank of China said in a statement that it has widened the yuan's trading band against non-U.S. dollar currencies to 3% from 1.5%.

Daily yuan-dollar trading in the interbank market remains unchanged at 0.3%.

Here's an interesting bit:

China said the move came to counter speculative currency market moves that would work against an appreciating yuan.

China Daily has more:

"Gradually the (People's Bank of China) will carry out fewer and fewer interventions in the foreign exchange market and let the market decide," Hu Xiaolian, deputy governor at the central bank, told the publication "Emerging Markets"...

But Hu, who is also China's foreign exchange chief, added: "We think it's still an open question as to whether the (yuan) exchange rate is undervalued."

"We can't expect the move will change the activity or strategy of the (central bank) in the foreign-exchange market overnight," Hu told the publication.

She said China still needed to take steps to ensure speculative inflows do not destabilize the economy.

"We should first further develop our capital markets and other domestic institutions, to better use our domestic market to finance business," she said. "We have to implement all kinds of control on this hot money. We have to keep our watch on capital inflows."

"We've repeated this many times: a stable exchange rate is in China's best interest," Hu said.

September 23, 2005 in Asia , Exchange Rates and the Dollar | Permalink


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Tang Xu, head of reaseach at the People's Bank of China reports that July's foreign reserves hit $740B up +$29B from June. He says the country hasn't detected any "abnormal" capital inflows since the pace is the same as last years.

At $740B the foreign reserves are about 44% of GDP and annualizing the monthly $29B puts the annual capital inflow at $348B or 20% of GDP.

Since China has about a $31B net annual trade surplus it would seem that $318B in "normal" capital flows are occurring.

If this is normal and thus isn't worrying Chinese officials I wonder what it would take for them to get nervous.

I don't know about you all, but I'd be plenty nervous. Just think if the Chinese equivalent foreign reserves were coming into the U.S. which would be $2.3T per year.

Why isn't anyone writing about this huge financial dislocation now occurring?

Posted by: Norman | September 23, 2005 at 04:23 PM

Such a hugh amount of FER ( amounting to $800 Billion in 2005 on a cumulative basis is really horrifyinga and if it adds up to 44-50% of China's GDP is really amazing if you look at the Country's net GDP and if Yuan is not undervalued, I wonder how the self-regulating mechanism can square off the pressure of Yuan not to continue appreciating but China is obviously using the visible hand as well as its administrative means gifted by the Socialism to withstand the international pressure in not to revalue Yuan.besides, just buying into Treasuries ot Government Agency Bonds could help a bit but it does not solve the actual problem because Yuan is awkwardly undervalued so that I tend to believe there is a trend for Yuan to continue appreciating no matter what sort of excuse you would like to say you are not.

Anyhow, China is already part of the World Economy, it should have the responsibility to bear the brunt of economic realities instead of hiding its head in the sand again.

Posted by: Steve | September 23, 2005 at 09:57 PM

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