Wednesday, September 29, 2010

House passes bill aimed at Chinese Yuan

WASHINGTON | Wed Sep 29, 2010 7:59pm EDT
(Reuters) - The House of Representatives on Wednesday passed legislation to pressure China to let its currency rise faster, fanning the flames of a long-running dispute over trade and jobs.
The bill passed by a vote of 348-79. Both Democrats and Republicans, speaking just over a month ahead of mid-term elections in which the economy has taken center stage, said it was time to take action to support U.S. jobs.
The House vote, with about 100 Republicans joining Democrats to pass the bill, cleared the legislation for action in the Senate.
However, any vote in the Senate won't come until after congressional elections on November 2 when the U.S. political landscape could be greatly changed, and odds have appeared to be against passage in the Senate.
The bill treats China's exchange rate as a subsidy, opening the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.
"China's persistent manipulation of its currency contributes to the outsourcing of American jobs and poses a very serious problem that requires real action," said House Ways and Means Committee Chairman Sander Levin.

Tuesday, September 28, 2010

Monday, September 27, 2010

Tuesday, September 21, 2010

U.S. yuan raid idea is fascinating but flawed

A top think tank has advised Washington to declare a currency war on China. The proposal from the Peterson Institute to force up the value of the yuan sounds fascinating, but a direct attack may be hard to pull off in practice. Beijing is likely to respond better to multi-lateral persuasion.
Peterson has called for a U.S. raid on the forwards market for the yuan, which it believes has to rise at least 25 percent against the dollar. The timing is good. U.S. lawmakers are already threatening to slap tariffs on Chinese imports, and the 1.5 percent rise of the yuan in the past two weeks hardly looks enough.
Targeting China’s currency directly goes to the heart of the problem, whereas duties only address exports from China on a product by product basis. Foreign traders can’t buy yuan in large quantities because of China’s strict capital controls, so the next best thing is “non-deliverable” forwards.
These forwards, where no yuan actually change hands, don’t directly impact the exchange rate. But a big rise in their value could give China a headache. If forwards seemed to price in strong appreciation, it could attract speculative inflows and make China’s asset bubbles worse.
While this idea is fascinating, the execution would be tricky. The size of the forwards market is just $1 billion on a volatile day. The United States could not intervene in such a small market without being noticed. That would risk inviting counter-trades by arbitrageurs, who might sell forwards even as the United States buys.
Beijing might also inflict losses on would-be raiders. If it resolutely fixed the yuan below the forward price, the trader would make a loss. Washington may thus struggle to find investors willing to do its bidding. Unlike Beijing, it doesn’t control its financial institutions, so can’t tell them to carry out unrewarding trades.
The biggest problem with Peterson’s idea, though, is that Washington can’t really justify manipulating the yuan when it is blaming Beijing for the same thing. Two wrongs don’t make a right. Transparent, multi-lateral pressure looks a better way to call for change.

Wednesday, September 15, 2010

Japan intervenes to weaken yen

Japan's bold strike to weaken its currency on Wednesday sent the yen tumbling more than 3.0 percent against the U.S. dollar, but unsettled allies who feared the unilateral move may complicate efforts to restore balanced global economic growth.

Japan unleashed waves of yen selling, estimated at more than $20 billion (12.8 billion pounds), which spread from Tokyo through New York trading. The sales, conducted alone without help from its Group of Seven partners, are expected to continue in the days ahead, Japanese news agency Nikkei reported.

Japan's first intervention in global currency markets in six years was not a complete surprise given that officials had tried to talk down the currency in recent weeks after it hit a 15-year high against the dollar.

But the timing and go-it-alone approach drew criticism. A top European official said coordinated action was a more effective means of adjusting exchange rates. And as the U.S. Congress began hearings on China's currency policy, a U.S. lawmaker called Japan's move "deeply disturbing."


Doubts remained though about how effective Japan's unilateral yen selling spree might be. A 15-month solo effort by Switzerland which ended earlier this year did little to tame the Swiss franc.

Like Japan, most advanced economies are grappling with slow growth at home, making exports an economic imperative. Japan's move heightened concerns that countries would launch a round of competitive devaluations to give their own exporters an edge.

U.S. lawmaker Sander Levin, who chairs the congressional committee examining China's currency policy, blamed Beijing for Japan's "deeply disturbing" intervention. Levin and many other U.S. lawmakers say China keeps the yuan artificially low, boosting its exports at the expense of U.S. companies.

"What's happening is that China's actions have affected Japan, and now Japan's actions affect us," he said.

Andrew Busch, global currency strategist at BMO Capital Markets in Chicago, said Japan's move would make it more difficult for Congress to get its message through to China.

"How can the Japanese get a pass to intervene when the Chinese are being criticized for essentially the same activity?" he said.

Some emerging markets were also wary of losing out in a beggar-thy-neighbour round of devaluations. Brazilian Finance Minister Guido Mantega said he would not sit on the sidelines "watching the game" while other countries weakened their currencies at the expense of Brazil.

"We're going to take appropriate measures to stop the real from appreciating," Mantega said in Rio de Janeiro.


The EU offered some sympathy for Tokyo's plight, saying too rapid yen appreciation could threaten economic recovery, but a top official said coordinated action would have been better.

"Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chairman of the Eurogroup of euro-zone finance ministers, said when asked about Japan's intervention.

U.S. officials at the Federal Reserve, White House and Treasury declined to comment.

After this week's victory in a party leadership contest, Japanese Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting the yen's strength which has weighed on stock prices and corporate profits.

The Japanese Prime Minister told reporters that Wednesday's intervention had some effect but the government was watching foreign exchange moves with a sense of urgency.

Aside from apparently acting alone, Japan faces the stiff task of trying to weaken the yen while other major central banks such as the U.S. Federal Reserve mull more steps to ease monetary policy, which could weigh on their currencies.

The dollar rose to 85.72 yen from its 15-year low beneath 83 yen, its biggest daily gain in nearly two years. It was last up 3.1 percent at 85.60 yen.


The Japanese currency's rise had brought it closer to its record peak of 79.75 per dollar set in 1995, squeezing exporters' profits, but Wednesday's yen drop helped push Tokyo stock market's Nikkei average up 2.3 percent.

It also pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year.

"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No. 2 automaker Honda Motor Co said in a statement.

Honda has pencilled in 87 yen per dollar in its estimates for the fiscal year to March 2011.

Billionaire financier George Soros said Japan was right to act to bring down the value of the yen.

"Certainly, they are hurting because the currency is too strong so I think they are right to intervene," Soros said at a Reuters Newsmaker event.

Japanese Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone. Noda said he was in contact with authorities overseas, and analysts expected Japan to be spared international criticism.

Unlike previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.

That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.

Authorities that sell their own currencies to weaken them often issue bills to "sterilise" the funds and keep the excess money from becoming inflationary. In Japan's case, it wants to promote inflation since the economy has been dogged by deflation for much of the past decade.

(Reporting by Tokyo newsroom; Additional reporting by Tara Joseph Hui in Hong Kong, Doug Palmer and Paul Eckert in Washington; Writing by Kevin Plumberg and Emily Kaiser; Editing by Mike Peacock and Neil Stempleman)

China's forex reserve growth rate slows down

China's foreign exchange (forex) reserve expanded by US$417.8 billion last year, $44.1 billion less than in 2007, the People's Bank of China (PBOC) said yesterday (January 13).

The central bank also said the supply of money and loan growth picked up in December, reflecting the government's effort to boost the economy through proactive fiscal and moderately loose monetary policies.
The country's forex reserve increased by less than $45 billion in the fourth quarter to $1.95 trillion by the end of 2008, a PBOC report said.

The reserve growth slowed over the months last year. The total reserve was up 27.34 per cent over 2007, the lowest rate since 2001.

The growth rate from January to September was 32.92 per cent and that from January to June 35.37 per cent.
The fall in the growth rate is the result of a shrinking trade surplus and a possible slowdown in the inflow of "hot money", analysts said.

But despite the slowing of the reserve growth for the whole of last year, the monthly reserve for December increased $61.3 billion, up $30 billion year-on-year, the PBOC said. The fourth quarter's reserve, though, dropped compared to the same period in 2007.

Guo Tianyong, a Central University of Finance and Economics professor, said expectations that the yuan would weaken and extraction of capital from the domestic market to help stabilise the supply of capital in the West were major factors that caused a year-on-year drop in the fourth quarter reserve.
December saw a sharp rise in the reserve as the Central Economic Work Conference vowed early that month to keep the yuan stable--at a reasonable and balanced level--he said. That reversed expectations of a weaker yuan.
The government has been worried over "hot money" being brought into the country by businesses and individuals speculating on the continuous rise of the yuan. It fears that it would create asset bubbles and increase the pressure for the yuan's revaluation, making the domestic financial system vulnerable.
The flow of "hot money" into the country, however, began to dry up after some developed countries de-leveraged their financial markets to overcome the global financial crisis, the analysts said.
Money supply

As the money supply picked up in December, M2, which includes cash and all types of deposits and indicates overall liquidity in the financial system, increased 17.8 per cent year-on-year. It had risen 14.8 per cent in November.

Banks extended 772 billion yuan in new loans in December, compared to 476.9 billion yuan in November. That helped the annual loan growth to accelerate to 18.76 percent in December, up 2.66 percentage points year-on-year.

The annual growth of money supply including cash in circulation and demand deposits, or M1, was 9.06 per cent in December compared to a 6.8 per cent in November.

The growth suggests the recent aggressive cuts in banks' reserve requirement ratios have helped improve liquidity, said Jing Ulrich, chairman of China equities at JPMorgan.

The PBOC has cut interest rates five times, totaling 2.16 percentage points, since September. It has reduced the amount of deposit that lenders have to set aside to boost liquidity, too.
Earlier, policymakers said the government would try to ensure a 17 per cent M2 growth this year despite the economic slowdown.

The moves, the analysts said, are expected to encourage banks to issue new loans, which are crucial for the government to deliver the $586-billion stimulus package.

But some economists fear that increased lending could lead to a spurt in bad loans because returns from infrastructure projects are less predictable than what they were a decade ago. Ten years ago, the government began building a wide network of highways and other infrastructure as part of its fight against the Asian financial crisis.

"The boost to the economy is obvious in the short term," said Ha Jiming, an economist with China International Capital Corporation. "But we need to keep an eye on the risk for lenders."

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Tuesday, September 14, 2010

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Sunday, September 12, 2010

Giant FX market now $4 trillion gorilla

Global foreign exchange has always been one of the biggest markets in the world but its exponential growth keeps accelerating. The triennial survey by the Bank for International Settlements shows global foreign exchange market turnover leapt 20 percent to $4 trillion, compared with $3.3 trillion three years ago.

The increase in turnover was driven by growth in spot transactions, which represent 37 percent of FX market turnover.  Turnover was driven by trading activity by “other financial institutions” — a category that includes hedge funds, pension funds and central banks, extending a trend seen in the past several years where buyside firms are increasingly trading currencies themselves, via prime brokerage, rather than turning to interbank dealers.

Also notably, emerging market currencies are gradually increasing their share in the marketplace. Turnover of the Russian rouble has increased its share in total turnover to 0.9 percent of 200 percent (FX is double counted as transaction involves two currencies), up from 0.7 percent three years ago, while the Brazilian real rose to 0.7 percent from 0.4 percent. The Indian rupee’s share rose to 0.9 percent from 0.7 percent. The dollar keeps its dominance, although off its 2001 peak, with its share standing at 84.9 percent.