RGE - Capital freedom, not exchange rate freedom …
リンク: RGE - Capital freedom, not exchange rate freedom ….
Brad Setser | Jan 29, 2007
That, more or less, is the conclusion of today’s Wall Street Journal oped on China.
I loved the title – talking of the People’s Investment Company is far more catchy than talking of a sovereign wealth fund or a government investment fund. But I didn’t love the content, as my regular readers know (this oped ran on Friday in the Asian edition of the Journal). It would be nice, for example, if the Journal recognized that foreign exchange reserves are an asset – not a liability – on a central bank’s balance sheet. The FT consistently gets these kinds of things right in its leaders.
But the bigger issue is would “capital freedom” – lifting China’s capital controls – reduce the pressures facing China’s central bank in the absence of “exchange rate freedom” – letting the RMB appreciate a bit.
My answer is an unequivocal no. There just isn’t much evidence private Chinese savers want dollars. At least not at current interest rates and exchange rates. The dollar share of domestic deposits is falling. Chinese savers aren’t shying away from the cleaned up domestic banking system (nor, for that matter, are foreign investors). There hasn’t been much interest in the Qualified Domestic Investor Initiative, as the Journal notes. And given how well Chinese stocks have done recently, it isn’t obvious that letting Chinese domestic investors buy equities would dramatically change the dynamics. Controls on outflows are being tightened, controls on inflows are loosened. The money that is flowing out of China seems to be coming from state institutions – whether state banks, state insurance companies or state pension funds.
If anyone has good evidence to the contrary – do tell. I would be most interested.
The basic problem China faces – highlighted by Dr. Jen among others – is that at current exchange rates both Chinese goods and Chinese financial assets are cheap. At least for foreigners. Conversely, both foreign goods and foreign financial assets are expensive for Chinese investors. At least for those who cannot borrow the PBoC’s dollars at a fixed rate in the swaps market …
As a result, my guess is that if China truly lifted all controls on capital at the current exchange rate, far more money would flow into China than would flow out of China. Rather than reducing pressure on China’s balance of payments, capital account liberalization would add to it. That is why I am fairly sure Chinese policy makers won’t be embracing “capital freedom” any time soon.
Update: I would happily take 3% on 3 year Chinese sterilization bonds plus any RMB appreciation over the next few years over 5% on Treasuries or 4% (ballpark) on safe euro denomianted bonds. 3% + 5% (appreciation) = 8%. 3%+3% = 6%. And my worst case scenario is that the RMB is basically stable ... and I lose 2% a year. I rather suspect that I am not the only one itching to do this trade if China dropped its capital controls.
Comments
http://www.nber.org/papers/w12850
Written by Guest on 2007-01-29 12:07:47
I suspect you are very much right on this. Not to mention that "freedom" is anathema to a government that is more known for being a control freak.
Written by HZ on 2007-01-29 12:11:40
Capital account liberalization would contribute to non-productive speculative "finance capitalism" activities but contributes little to "real wealth" Industrial production. For economies where the currencies are freely convertible, the cost can be massive attacks on their currencies by Wall Street speculators, such as hedge funds, that would quickly drain the government’s foreign exchange reserves and cause a collapse in the economy’s debt market. Regardless if the exchange rate is fixed by government or by market forces, the volatility in the gap between the economic value of a fiat currency and its exchange rate is the main cause of financial instability. Exchange rate policies cannot be substitutes for structural economic adjustments necessary for mutually beneficial trade between two economies.
Written by Dave Chiang on 2007-01-29 12:12:06
i pretty much only disagree with Menzie Chinn on one thing, and that is the interpretation of the data in NBER paper. when I look at the data, it seems to me that the RMB is very, very close to the boundary suggesting undervaluation on a statistical test where is hard to hit that boundary. Tis easiest to see on the graph in on econbrowser.
http://www.econbrowser.com/archives/2006/04/is_the_rmb_unde_1.html
The RMB may not meet the formal test for undervaluation, but it still looks undervalued (as of 2003). Combined that with ongoing productivity growth, a bit more $ devaluation and China's booming trade and current account surplus, and I feel pretty confident asserting a large undervaluation now.
http://www.econbrowser.com/archives/2006/04/is_the_rmb_unde_1.html
The RMB may not meet the formal test for undervaluation, but it still looks undervalued (as of 2003). Combined that with ongoing productivity growth, a bit more $ devaluation and China's booming trade and current account surplus, and I feel pretty confident asserting a large undervaluation now.
Written by bsetser on 2007-01-29 12:24:30
One of the readings I've assigned to my students concerns Robert Mundell's "impossible trinity." Nobel Prize winner Mundell argues that an open economy can only have 2 out of the following 3:
1. Exchange rate stability
2. Monetary independence
3. Financial market integration
Presumably, the WSJ is calling for 1 and 3, though we cannot be sure as they do not seem to know what a central bank's balance sheet looks like.
OTOH, Roubini and Setser appear to favor 2 and 3 (correct me if I'm wrong). Hu am I to disagree with them?
1. Exchange rate stability
2. Monetary independence
3. Financial market integration
Presumably, the WSJ is calling for 1 and 3, though we cannot be sure as they do not seem to know what a central bank's balance sheet looks like.
OTOH, Roubini and Setser appear to favor 2 and 3 (correct me if I'm wrong). Hu am I to disagree with them?
Written by Emmanuel on 2007-01-29 12:58:32
I favor 2 and 3 in the long-run, but in the short-run, a gradual appreciation is effectively a variant on 1) (with stability being a slower rate of appreciation than required in the market), which effectively requires continuing with 3) (cap controls) to have any monetary independence. Tho in practice right now China's doesn't have monetary independence -- int. rates are set by the XR goal. What it still has is administrative contrls to limit credit growth at that int. rate.
Written by bsetser on 2007-01-29 13:08:11
"cleaned up domestic banking system" ?
"Gao Shan, former head of a Bank of China branch in northeastern China, is alleged to have siphoned off huge sums from the accounts of customers and transferred the money illegally to an account in Canada... But a Canadian source said the RCMP is still investigating the case and does not have Mr. Gao in custody... Ottawa and Beijing do not have an extradition treaty — largely because of Canadian concerns that a suspect could be executed after being deported to China. There are more executions in China than in the rest of the world combined... Embezzlement at the Bank of China is hardly rare - several major Chinese financial institutions have been plagued by corruption cases in recent years... More than 1,270 embezzlement cases were reported in 2005 alone..." http://www.theglobeandmail.com/servlet/story/RTGAM.20070129.wchina29/BNStory/National/home
"Gao Shan, former head of a Bank of China branch in northeastern China, is alleged to have siphoned off huge sums from the accounts of customers and transferred the money illegally to an account in Canada... But a Canadian source said the RCMP is still investigating the case and does not have Mr. Gao in custody... Ottawa and Beijing do not have an extradition treaty — largely because of Canadian concerns that a suspect could be executed after being deported to China. There are more executions in China than in the rest of the world combined... Embezzlement at the Bank of China is hardly rare - several major Chinese financial institutions have been plagued by corruption cases in recent years... More than 1,270 embezzlement cases were reported in 2005 alone..." http://www.theglobeandmail.com/servlet/story/RTGAM.20070129.wchina29/BNStory/National/home
Written by Guest on 2007-01-29 13:21:44
cleaned up relative to 2000-03, absolutely. lage amounts of npls have been moved off the books ofBOC, ICBC and CCB. All are in far better shape than they used to be; all have big market caps and have made their foreign partners a ton of money. ABC is a different story.
perfectly clean? of course not.
in addition to "embezzlement" I suspect there is still a lot connected lending to projects favored by the local party cadres. more importantly, the banks are still far from able to allocate credit on a market basis -- they face real administrative controls and have become a vehicle for helping the PBoC to sterilize China's reserve buildup.
but -- judging from the deposit data -- Chinese savers are happy to keep their savings in those banks ...
perfectly clean? of course not.
in addition to "embezzlement" I suspect there is still a lot connected lending to projects favored by the local party cadres. more importantly, the banks are still far from able to allocate credit on a market basis -- they face real administrative controls and have become a vehicle for helping the PBoC to sterilize China's reserve buildup.
but -- judging from the deposit data -- Chinese savers are happy to keep their savings in those banks ...
Written by bsetser on 2007-01-29 13:39:18
"Chinese savers are happy to keep their savings in those banks"
Aren't the options somewhat limited? Reading the news here, can't help but wonder if it may be a requirement (or else) at least in some cases...
Aren't the options somewhat limited? Reading the news here, can't help but wonder if it may be a requirement (or else) at least in some cases...
Written by Guest on 2007-01-29 13:54:06
less limited than you might think -- look at the scale of hot money outflows back in 98/99 .... and consider various current option (domestic stocks, domestic mutual funds, curb lending markets, formal capital outflows, domestic $ deposits in local banks, etc). I don't think you can realistically argue that the Chinese saver has no option -- and right now, the overwhelming evidence suggests that if given a choice between onshore RMB and offshore $ or onshore $, they will tend to choose onshore RMB.
Written by bsetser on 2007-01-29 14:22:48
yes the chinese save.. and they are the most prolific gamblers too.. and they are gambling now-- on an RMB appreciation.. which also supports their overconcentration in real estate..and they've been making the bet for 3-4 years now..i dont think this issue is as obvious as u argue it is..
Written by Guest on 2007-01-29 14:50:46
William Pesek writes in Bloomberg that since the US always wants to be respected as the unipolar world leader, why doesn't the US start acting responsibly like one. Instead the Chinese are usually blamed for everything by the Washington Consensus, from global warming to the loss of manufacturing jobs from the yuan's currency exchange rate. William Pesek writes,
" Other than being among the most contentious issues of the day, China's currency and global warming have little in common -- unless you are George W. Bush.
The U.S. president has been slow to realize that if he wants China to allow the yuan to strengthen, he must offer something. In return for a rising currency, for example, China wants the U.S. to fix its current-account and budget deficits. Now that Bush seems to be taking a green turn -- he's speaking more about climate change than ever -- there's an expectation that the onus will shift the problem to developing nations such as China.
Asians have every right to view Bush's plans with skepticism. In recent years, the president talked about the need for conservation and alternative fuels, yet he didn't follow through. The White House would be wise to apply some of the lessons it has learned from China's reluctance to boost the yuan.
It would be helpful if the U.S., the biggest producer of greenhouse gases, led by example. Even after Bush's State of the Union proposal to cut gasoline consumption by 20 percent during the next 10 years, the U.S. is failing to provide leadership. Bush's push is far more about energy independence from the Middle East than about reversing global warming. "
- William Pesek
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aDggQQs67FvE
Written by Dave Chiang on 2007-01-29 15:22:56
DC -- I used to have more sympathy for the "US needs to do its part" argument than i do now. Much as i dislike the Bushies, they have brought the fiscal deficit down from @ $400b to @$250b over the past two years. THat is basically what China wanted from the US. Don't get me wrong, the us could have done more. But the US did do something, and directionally it was want China wanted.
during that period, China's surplus rose to nearly 10% of its GDP ...
and, more fundamentally, the case for China changing is that change is ultimately in China's interest.
I fully understand that the rest of the world doesn't like being lectured by the Us. The us tried to address that too, by having the imf take a bigger role. but lots of emerging markets resisted having the imf do things like publish estimated equilibrium exchange rates ... so the imf gave up, putting the ball back in the hands of the US/ China.
during that period, China's surplus rose to nearly 10% of its GDP ...
and, more fundamentally, the case for China changing is that change is ultimately in China's interest.
I fully understand that the rest of the world doesn't like being lectured by the Us. The us tried to address that too, by having the imf take a bigger role. but lots of emerging markets resisted having the imf do things like publish estimated equilibrium exchange rates ... so the imf gave up, putting the ball back in the hands of the US/ China.
Written by bsetser on 2007-01-29 16:43:08
Here is a very basic question hopefully someone here can answer for me.
why global unbalance is a bad thing?
In any economy, there are savers and there are spenders, so we have banks/stock markets..etc all the financial institutions to act as an intermediary between the two... the whole system works wonderfully...you don't hear ppl complaining about "unbalance" on the individual level. my neighbor loves to save, I love to spend, we are both happy.
why is it any different at the country level? we have some countries for one reason or another want to save, and some others want to spend, why is this bad?
as far as I can tell, global financial market is functioning pretty well to satisfy everyone's need.
why global unbalance is a bad thing?
In any economy, there are savers and there are spenders, so we have banks/stock markets..etc all the financial institutions to act as an intermediary between the two... the whole system works wonderfully...you don't hear ppl complaining about "unbalance" on the individual level. my neighbor loves to save, I love to spend, we are both happy.
why is it any different at the country level? we have some countries for one reason or another want to save, and some others want to spend, why is this bad?
as far as I can tell, global financial market is functioning pretty well to satisfy everyone's need.
Written by Guest on 2007-01-29 16:46:25
Guest
Exactly!
And here's another similarly basic (rhetorical) question: Why do we consider that exchange rate flexibility is the market mechanism when traditional markets work perfectly well without such a mechanism? If one guy with a fruit stall is not selling any bananas because his are more expensive than those of the other traders, he either cuts the price of bananas, or gives up trying to sell them. He does not lower his entire range of prices.
Exactly!
And here's another similarly basic (rhetorical) question: Why do we consider that exchange rate flexibility is the market mechanism when traditional markets work perfectly well without such a mechanism? If one guy with a fruit stall is not selling any bananas because his are more expensive than those of the other traders, he either cuts the price of bananas, or gives up trying to sell them. He does not lower his entire range of prices.
Written by Guest on 2007-01-29 18:00:54
1. Exchange rate stability
2. Monetary independence
3. Financial market integration
Forgive me if I'm in error, but doesen't the U.S. have all these things relatively speaking?
2. Monetary independence
3. Financial market integration
Forgive me if I'm in error, but doesen't the U.S. have all these things relatively speaking?
Written by DRR on 2007-01-29 22:07:36
DRR, yes, but only because others give up their monetary independence to maintain stability in their exchange rate, and in the process, generate stability in the dollar.
Re: why worry ... well ...
classically, sustained 7% of GDP current account deficits and big financing needs auger future trouble. but i realize i cried wolf a bit too early ...
sustained 7% of GDP trade and transfer deficits over time imply a rising current account deficit (higher net interest payments) and not many countries have sustained larger than 7% of GDP deficits for long
the us export base/ tradables sector is actually small relative to the US deficit, suggesting a risk that the adjustment process might be painful (conversely, the US debt structure is very favorable to the us/ unfavorable to us creditors)
but that means lots of poor savers in emerging economies are gonna take big losses on their loans to the us, and the longer this goes on, the bigger the losses
probably as a result, the flows that sustain the us deficit are not by and large market flows, but rather in a very large part non-market flows. private markets want to finance a far smaller us current account deficit and a current account deficit in the emerging world. that in some sense means the current pattern of savings and spending is distorted globally
the us more external debt the us builds up (i realize that so far net us external debt isn't rising -- or more accurately, the niip isn't deteriorating, but that won't last forever), the more income future us workers will have to send abroad. the us is in effect gonna have to finance the retirement of its own baby boomers and help finance the retirement of lots of folks in east asia while paying for the education of lots of folks in the middle east (as they start collecting interst on their lending to the us) in twenty or thirty years. remember, in any gradual adjustment scenario that keeps the us current account deficit constant or brings it down slowly over time, the us net external debt almost certainly rises ...
I recommend my testimony to the Joint Economic Committee -- or even better, Larry Summers speech in Hong Kong or his IIE lecture from 2003 for a good overview of the "worry case". Tim Geithner's speech on external adjustment is also good.
Re: why worry ... well ...
classically, sustained 7% of GDP current account deficits and big financing needs auger future trouble. but i realize i cried wolf a bit too early ...
sustained 7% of GDP trade and transfer deficits over time imply a rising current account deficit (higher net interest payments) and not many countries have sustained larger than 7% of GDP deficits for long
the us export base/ tradables sector is actually small relative to the US deficit, suggesting a risk that the adjustment process might be painful (conversely, the US debt structure is very favorable to the us/ unfavorable to us creditors)
but that means lots of poor savers in emerging economies are gonna take big losses on their loans to the us, and the longer this goes on, the bigger the losses
probably as a result, the flows that sustain the us deficit are not by and large market flows, but rather in a very large part non-market flows. private markets want to finance a far smaller us current account deficit and a current account deficit in the emerging world. that in some sense means the current pattern of savings and spending is distorted globally
the us more external debt the us builds up (i realize that so far net us external debt isn't rising -- or more accurately, the niip isn't deteriorating, but that won't last forever), the more income future us workers will have to send abroad. the us is in effect gonna have to finance the retirement of its own baby boomers and help finance the retirement of lots of folks in east asia while paying for the education of lots of folks in the middle east (as they start collecting interst on their lending to the us) in twenty or thirty years. remember, in any gradual adjustment scenario that keeps the us current account deficit constant or brings it down slowly over time, the us net external debt almost certainly rises ...
I recommend my testimony to the Joint Economic Committee -- or even better, Larry Summers speech in Hong Kong or his IIE lecture from 2003 for a good overview of the "worry case". Tim Geithner's speech on external adjustment is also good.
Written by bsetser on 2007-01-29 22:22:31
bsetser,
Seems to me you've laid down some excellent advice to "savers" in emerging markets. What do you think might happen if they take this advice?
(The quotes are meant to glue some little scrap of cloth over the terrible wounds that 20th-century economics inflicted on the English language. To me, as I think to anyone who was to approach the question from first principles, a "saver" should be one who stores currency or other commodities, a hoarder, as Lord Keynes might say. The use of the term to refer to those who lend money at indefinite maturity to officially authorized institutions, a so-called "deposit," is Orwellian in the first degree.)
But never mind all this. We know what we mean. And what we mean is that those who lend to institutions whose assets consist substantially of fixed-income dollar obligations, even if their lending contract is not denominated in dollars, face a substantial haircut in any adjustment. Which, since these actors are state-insured, is more likely to be expressed in terms of dilution ("inflation") than in terms of default. But a haircut is a haircut.
Obviously, as you point out, rushing out of RMB and into the dollar is exchanging frying pan for fire.
You could move your portfolio into real estate or equities. And certainly when we look at China we see this happening.
But historically, real estate and equities are not effective stores of wealth unless they are valued fairly, using the usual asset pricing models, in terms of a monetary system that is itself an effective store of wealth. Goods are ideal stores of wealth if an influx of indirect demand (demand from actors who want to transfer wealth across time, but have no intrinsic interest in the good itself) drives up their price rather than their quantity. This implies some form of scarcity. Real estate and equities do exhibit some kinds of scarcity in some markets, but by and large, buildings and factories cannot sustain a price above their cost of production. And they can drop substantially beneath this cost if a wave of indirect demand that has increased the quantity of these assets rushes back out again.
So, in lieu of their national banking systems, and (if you accept this argument) in lieu of their already rather bubbly-looking domestic stock and real estate markets, what other assets would you recommend to the erstwhile "savers" in China etc? Australian dollars? Bulgarian seaside villas? Carbon mitigation credits...?
Seems to me you've laid down some excellent advice to "savers" in emerging markets. What do you think might happen if they take this advice?
(The quotes are meant to glue some little scrap of cloth over the terrible wounds that 20th-century economics inflicted on the English language. To me, as I think to anyone who was to approach the question from first principles, a "saver" should be one who stores currency or other commodities, a hoarder, as Lord Keynes might say. The use of the term to refer to those who lend money at indefinite maturity to officially authorized institutions, a so-called "deposit," is Orwellian in the first degree.)
But never mind all this. We know what we mean. And what we mean is that those who lend to institutions whose assets consist substantially of fixed-income dollar obligations, even if their lending contract is not denominated in dollars, face a substantial haircut in any adjustment. Which, since these actors are state-insured, is more likely to be expressed in terms of dilution ("inflation") than in terms of default. But a haircut is a haircut.
Obviously, as you point out, rushing out of RMB and into the dollar is exchanging frying pan for fire.
You could move your portfolio into real estate or equities. And certainly when we look at China we see this happening.
But historically, real estate and equities are not effective stores of wealth unless they are valued fairly, using the usual asset pricing models, in terms of a monetary system that is itself an effective store of wealth. Goods are ideal stores of wealth if an influx of indirect demand (demand from actors who want to transfer wealth across time, but have no intrinsic interest in the good itself) drives up their price rather than their quantity. This implies some form of scarcity. Real estate and equities do exhibit some kinds of scarcity in some markets, but by and large, buildings and factories cannot sustain a price above their cost of production. And they can drop substantially beneath this cost if a wave of indirect demand that has increased the quantity of these assets rushes back out again.
So, in lieu of their national banking systems, and (if you accept this argument) in lieu of their already rather bubbly-looking domestic stock and real estate markets, what other assets would you recommend to the erstwhile "savers" in China etc? Australian dollars? Bulgarian seaside villas? Carbon mitigation credits...?
Written by moldbug on 2007-01-30 00:38:57
China's stock markets risk disruptions from record turnover and growing volatility, the Shanghai Stock Exchange has warned in the latest sign regulators are alarmed over the market's recent surges....
Trading volumes in Shanghai have soared since the beginning of the year, with turnover in the first two weeks at 1.2 trillion yuan (US$154 billion) compared with 6 trillion yuan for all of 2006 (US$772 billion)...and last year's figure was triple the turnover in 2005.
http://www.chinadaily.com.cn/china/2007-01/30/content_796535.htm
Trading volumes in Shanghai have soared since the beginning of the year, with turnover in the first two weeks at 1.2 trillion yuan (US$154 billion) compared with 6 trillion yuan for all of 2006 (US$772 billion)...and last year's figure was triple the turnover in 2005.
http://www.chinadaily.com.cn/china/2007-01/30/content_796535.htm
Written by Guest on 2007-01-30 01:43:36
“At the moment, there are not many investment opportunities for people inside China,” Mr. Yang said..." http://www.nytimes.com/2007/01/30/world/asia/30china.html?hp&ex=1170219600&en=5e482dafe4ede723&ei=5094&partner=homepage
"...Liu Mingkang, the chairman of the China Banking Regulatory Commission, was asked if he was confident that he had accurate figures on the financial health of the institutions he regulates. He did not exactly say yes or no. “I’m not,” he explained, “a good guy with figures.” http://dealbook.blogs.nytimes.com/2007/01/25/whod-expect-otherwise/
"...Liu Mingkang, the chairman of the China Banking Regulatory Commission, was asked if he was confident that he had accurate figures on the financial health of the institutions he regulates. He did not exactly say yes or no. “I’m not,” he explained, “a good guy with figures.” http://dealbook.blogs.nytimes.com/2007/01/25/whod-expect-otherwise/
Written by Guest on 2007-01-30 05:54:34
DRR: I'd say the United States has effectively outsourced its monetary policy to the Chinese, hence Greenspan's bond "conundrum." As Meat Loaf sang, perhaps "Two Out of Three Ain't Bad". Don't mess with Meat ;-)
Written by Emmanuel on 2007-01-30 06:06:38
Moldbug, - "If they.....", my guesses are that, within a reasonably short horizon:
Nikkei 38,0000 (again)(and this is first 'cause its dear to my heart)
Dow 30,000 (Glassman will be right, but for the wrong reasons)
Gold $2,500/z
HSI 50,000
Oil $150/bbl
US Bond 8% (surely something wrong here??!? -ed.)
Corn $12/bu
Wheat $9/bu
Prime US Farmland $15000/ac
US Timberlands $4500/ac
Starbucks Tall Skim decaf Frappucino $11.99
Real Interest Rates -2.5% (negative 2.5%)
One Honus Wagner T206 Baseball Card $2,500,000
Van gogh "Portrait of Dr Gachet" $400,000,000 (punters beware of this one - it is poisonuous, but vanity will prevail)
unadulterated $CPI - ??!?!?
$PPI - ??!?!?
Still not bad in comparison to Zimbabwe or Weimar (though that's not setting the bar very high).
Nikkei 38,0000 (again)(and this is first 'cause its dear to my heart)
Dow 30,000 (Glassman will be right, but for the wrong reasons)
Gold $2,500/z
HSI 50,000
Oil $150/bbl
US Bond 8% (surely something wrong here??!? -ed.)
Corn $12/bu
Wheat $9/bu
Prime US Farmland $15000/ac
US Timberlands $4500/ac
Starbucks Tall Skim decaf Frappucino $11.99
Real Interest Rates -2.5% (negative 2.5%)
One Honus Wagner T206 Baseball Card $2,500,000
Van gogh "Portrait of Dr Gachet" $400,000,000 (punters beware of this one - it is poisonuous, but vanity will prevail)
unadulterated $CPI - ??!?!?
$PPI - ??!?!?
Still not bad in comparison to Zimbabwe or Weimar (though that's not setting the bar very high).
Written by Cassandra on 2007-01-30 06:52:03
Guest -- are you trying to suggest that right now, Chinese domestic residents (setting the state banks and pension funds aside) prefer US $ denominated foreign assets (or would, if given a chance -- remember, china just liberalized controls) to the various domestic assets on offer -- whether bank deposits, gov. bonds, real estate or domestic equities? The question isn't really whether there are as a broad a range of options as in the us -- there aren't. The quesiton is whether -- at current exchange rate and interest rates -- foreign assets are more attractive than domestic assets. I think the frenxy in Shanghai is pretty good evidence that they aren't, at least not now --
if you disagree, please tell me how this shows up in the balance of payments -- are private investors (but not those in QDII) behind the $45b in foreing debt purchases that show up in the first half in the BOP? If so, how -- what institutions are they investing in that channel their funds abroad? Are there other lines in the BOP that suggest a strong desire to move funds out of China, as there were in 98/99?
Remember, in $ terms, with 5% appreciation, china is offering 8% on safe government instruments -- well above what the us offers on riskier kinds of instruments (most corp bonds/ mortgages)
moreover, unless the outflows are massive -- 10% of GDP or more -- they would be overwhelmed by the inflows associated with the current account surplus and net fdi inflows ...
if you disagree, please tell me how this shows up in the balance of payments -- are private investors (but not those in QDII) behind the $45b in foreing debt purchases that show up in the first half in the BOP? If so, how -- what institutions are they investing in that channel their funds abroad? Are there other lines in the BOP that suggest a strong desire to move funds out of China, as there were in 98/99?
Remember, in $ terms, with 5% appreciation, china is offering 8% on safe government instruments -- well above what the us offers on riskier kinds of instruments (most corp bonds/ mortgages)
moreover, unless the outflows are massive -- 10% of GDP or more -- they would be overwhelmed by the inflows associated with the current account surplus and net fdi inflows ...
Written by bsetser on 2007-01-30 08:01:43
brad,
i didnt know if you saw this, but, i would like to hear your thoughts pls re the implications. is a financial crisis likely as a result?
**Falling yen sparks carry trade alert.......According to Barclays Capital, speculative carry trades have reached their highest level since the Russian crisis in 1998 FT; According to Barclays Capital, speculative carry trades have reached their highest level since the Russian crisis in 1998.
i didnt know if you saw this, but, i would like to hear your thoughts pls re the implications. is a financial crisis likely as a result?
**Falling yen sparks carry trade alert.......According to Barclays Capital, speculative carry trades have reached their highest level since the Russian crisis in 1998 FT; According to Barclays Capital, speculative carry trades have reached their highest level since the Russian crisis in 1998.
Written by Guest on 2007-01-30 08:26:07
Booming Chinese stock market
http://www.nytimes.com/2007/01/30/world/asia/30china.html?_r=1&oref=slogin
China’s stock markets are almost going mad, actually, with the leading Shanghai Composite Index approaching 3,000 and Chinese investors flocking to buy shares in record numbers. The bull market is so powerful — the Shanghai market hit a record high last week and was among the best performing in the world last year — that one senior Chinese official has warned against “blind optimism.”
“Of course, the market in China is not as regulated as in America or Britain,” Mr. Lu said. “The Chinese market is much younger, so you are going to have risk. But I think the government is trying to straighten things out so that the market will become stronger.”
Written by Dave Chiang on 2007-01-30 09:58:48
Brad - how much can a government intervene in a market and still call that market a market?
Written by Guest on 2007-01-30 11:03:32
Brad--You are aboslutely right in saying that China should not liberalize capital controls now, because that would only increase presuure on the currency market. The best policy is gradually appreciate the currency first, and then liberalize the capital account after undervaluation is eliminated.
I suspect that either Wall Street people do not understand China's current economic situation or they disregard China's as well as global interest completely.
I suspect that either Wall Street people do not understand China's current economic situation or they disregard China's as well as global interest completely.
Written by HK on 2007-01-30 11:23:59
"Update: I would happily take 3% on 3 year Chinese sterilization bonds plus any RMB appreciation over the next few years over 5% on Treasuries or 4% (ballpark) on safe euro denomianted bonds. 3% + 5% (appreciation) = 8%. 3%+3% = 6%. And my worst case scenario is that the RMB is basically stable ... and I lose 2%
