ASIABIZBLOG

In an article worth reading, Caroline Baum, a Bloomberg columnist, imagines that “Asian central banks are poised on the edge of a cliff.”

A vivid metaphor, indeed. In other words, given recent signals from Japanese and Korean officials, it would appear that the US dollar hovers on the brink of an extreme revaluation.

Unsurprisingly, given the great set-up in the article’s first sentence, Ms. Baum then asks the question: “Who will be the first to jump?” Any answer to this question presupposes that someone will jump.

Ms. Baum goes even further, explicitly encouraging a first mover. “It would be much smarter for these banks to quietly sell dollars, if that's what they want to do, without calling attention to it.”

But will any of the central banks jump into the abyss?

If media reports are to be believed - please be skeptical - many think so. On an unusually warm weekday at the end of last year, certain currency traders expected a devaluation of the renminbi over the weekend – drinks were had all around on the Saturday, but no one had yet profited from that bet. Nor months later, as of today.

To be sure, the idea of RMB devaluation has been batted around like a badminton birdie since the late 90s. More conflicting signals from the Chinese government – if signals they be, instead of expressions of indecision – confuse the issue.

I have steadily maintained that a major revaluation runs contrary to China’s national interest. [Here and here.] This, despite indications that China must do so or suffer the economic consequences, as summarized by James Dorn, here.

At the end of 2004, Chinese foreign reserves reached US$610bn, an enormous sum by any earthly measure. But Chinese officials, historically, tend to use even grander measures to gauge China. Zhou Xiaochuan, governor of the People’s Bank of China has stated that "China's foreign reserves are indeed somewhat high, but not by any big magnitude.”

A major policy change is, of course, possible. After all, China raised interest rates after many years of speculation and chatter. But only after foreign governments shut up and stopped complaining about it. Indeed, when the day comes for the peg to be removed, it will happen only after foreign governments stop complaining about it - and when Chinese officials under difficult circumstances have no choice but to do so. And when they do so, that action will be explosive and change China as greatly as removal of Taiwan's NT dollar to US dollar peg changed Taiwanese economic life.

Note, however, that the Chinese central bank has diversified over the past few years away from the US dollar to Euros. Is this the “quiet selling” that Ms. Baum suggests for the Japanese and Koreans?

Imagine what might happen when – if – the Asian central banks jump, having first hollered. (Of course, the hollering is aimed at the ears of their dear friend, the government of the United States of America, for help in an hour of need.)

Imagine when - if - the current administration fails to put a good word in for their allies in the region and, by not informing the markets that the value of the dollar is sacrosanct, fails to pre-empt the radical dollar movement everyone but the administration fears. Suddenly, it is sold in great quantity. It tanks. US Treasuries held by those foreign governments concomitantly suffer enormous loss in value.

The first mover may gain somewhat – but everyone loses in the end. A jump into the abyss.

The traditional misidentification of China as the “Middle Kingdom,” a literal translation of 中国 (zhong-guo), leads many modern observers to claim, as did their 19 century counterparts, that China has been an historically insular nation which sees itself as the “center of the world.”

Originally, more than two millennia ago, the term was understood to have several meanings, none of which encompassed that of the English translation. It has never meant what we have ascribed to it.

Furthermore, several dynasties of yore were cosmopolitan in a very modern sense. The Tang (唐) dynasty is the cosmo poster boy most often trotted out by Sinologists. Our recent burgeoning of Sino-Western contact is hardly a new phenomenon.

So let us dump on the ash heap of historiography the fantasy of a timeless “Middle Kingdom” which, because it sees itself as the center of the universe, is predisposed to disregard the rest of the world. Chinese do not see themselves to be anymore at the center of the international world than do Americans.

And yet, Chinese often blithely wander their own way with scant regard for the international sphere, and, it would appear, to their detriment. We have a timely example, in fact, that takes us to Korea on our way to the mainland.

Korea, having seen Japan’s threat to change its currency mix fail to move the Bush administration to strengthen the dollar, issued notice of a surprising policy change. Korea will now encourage outbound investment in an attempt to move offshore much its massive foreign currency reserves of $205.4 billion. As the Korea Times article notes,

"The policy shift is considered a big step to slow the pace of the won’s appreciation against the U.S. dollar and reduce the widening deficit in the service account as well as stabilize the domestic real estate market."

The Chinese government, on the other hand, steadfastly maintains its RMB to USD peg, is unable to contain rampant property speculation and continues to accumulate foreign currency reserves (foreboding grave consequences, including inflation). A recent World Bank report warns of the potential for large capital losses to those countries with excessive foreign currency reserves.

In October, 2004, Chinese regulation was promulgated to make it somewhat easier for businesses, as opposed to individuals, to invest overseas, given the requirement of specific approvals. See page 3 of this document.

Contradictorily, and despite the economic risks, China has this past month decided to place severe constraints upon individual, as opposed to business, outbound investment. As Barbara Mok of Jones Day writes, “Outbound investment by domestic residents becomes more difficult, if not impossible.”

The impetus for the State Administration of Foreign Exchange (SAFE) regulation on individual investment may have been rooted in an attempt to curtail the pilfering of state assets. But is it any less difficult for a business to manipulate the approvals system?

The contradiction embodied by these regulations -- allowing business while curtailing individual investment -- may perhaps have originated in a disagreement among the various ministries involved. But, I am unsure of the validity of this assessment.

Chinese individuals have virtually no investment options. The Chinese stock markets continue their 6 year slide. Other than the very scary real property markets or the boringly unremunerative savings account in a state bank, gold bullion and postage stamps are what is laughably left.

If individuals were allowed to invest overseas, money would explosively drain out of China to places where it would find its higher return. The plug must stick in the drain, it seems, for fear that a freer flow of capital will wash it away.

UPDATE, June 23, 2005:

Greenspan informs U.S. Congress that revaluing the renminbi will not increase manufacturing activity or jobs in the United State.

Original post:

Without further comment, please see:

New York Times [Registration Required]

Bloomberg

For the response from PRC officials, see this.

And an article on the Chinese "rejection" of revaluation from the Financial Times. [Registration required.]

More than you need here. [In Chinese.]

For background, see this. [In English.]

Greenspan informs U.S. Congress that revaluing the renminbi will not increase manufacturing activity or jobs in the United State.

Listen to the entire testimony to the Senate Panel on U.S.-China Economic Relations. It was a spirited debate, with Greenspan and Snow face to face in the ring. One, and only one, of them at his rhetorical finest.

Several senators jumped on the pile, as they are wont to do. One performed an execrable impression of Mike Tyson chewing on Holyfield's ear. (Holyfield won, nonetheless.) Worth your time, if only for entertainment value.

Bloomberg and FT report that China has removed the renminbi's peg to the US dollar. At first glance, one doesn't see how this is anything other than a token offering lacking real substance: the Yuan is re-pegged at 8.11 and then allowed to trade within a very narrow band.

Along with a Q&A in Chinese, here is the statement of the People's Bank of China in English in its entirety:

Public Announcement of the People's Bank of China on Reforming the RMB Exchange Rate Regime

July 21, 2005

With a view to establish and improve the socialist market economic system in China, enable the market to fully play its role in resource allocation as well as to put in place and further strengthen the managed floating exchange rate regime based on market supply and demand, the People's Bank of China, with authorization of the State Council, is hereby making the following announcements regarding reforming the RMB exchange rate regime:

1. Starting from July 21, 2005, China will reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility.

2. The People's Bank of China will announce the closing price of a foreign currency such as the US dollar traded against the RMB in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day.

3. The exchange rate of the US dollar against the RMB will be adjusted to 8.11 yuan per US dollar at the time of 19:00 hours of July 21, 2005. The foreign exchange designated banks may since adjust quotations of foreign currencies to their customers.

4. The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will continue to be allowed to float within a band of ��0.3 percent around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.

[Editor's note: "??0.3" appears in the original text.]

The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation. The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies. The People's Bank of China is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.

While John Snow, Secretary of the United States Treasury, publicly offered praise, forex specialists downplayed the revaluation of the Chinese yuan, as did we. Why? A mere 2.1% movement in the currency, a narrow band of 0.3% in which it will trade – when 5-10% was predicted -- and the statement by Li De-shui that five more years will pass before the yuan may (not “will”) trade freely.

Chinese policy will change whenever it does, regardless of announcements. The chaotic torrent of conflicting statements on revaluation prior to that of last Thursday is proof aplenty. (I hesitate linking to them all for lack of space.) So the possibility of further revaluation exists. As does intelligent life on Neptune.

Indeed, it is more than likely than any further revaluation of the currency, if any occurs, will occur in the far-off future. This minor revaluation relieves China of its burden – mounting international pressure to acknowledge and appease. One can almost hear the echoes from half a globe away: “ 好了, 好了！给他们一点点就算了！” (“All right already, give them a little and be done with it!”)

Many outside China, however, had awaited more significant change with bated breath. Did the Chinese leadership expect that less would be seen as more? Not likely.

Since the earliest days of this weblog in 2000, I’ve consistently predicted that the yuan would not be revalued. [Unfortunately, the old site hosted at Salon.com is no longer accessible.] Despite economic indicators, unreliable at their core, and a Western fantasy of a China integrated with the world community, the Chinese leadership was unlikely to jump at an opportunity to injure the national interest where no palpable threat could be discerned.

After all, a fragile financial system and an uncontrollable currency make for frightening bedfellows. Remember what happened in Taiwan after revaluation in the mid-1980s -- I was there when it did -- and that system was stable. Exporters faced a miserable profit crunch that forced many out of business or off into southeast Asia; the island opened to competing imported products; and buyers went elsewhere to find sources. Just as importantly, the culture of the island changed，one would dare to say, radically.

And let us not forget the Chinese export machine that attracts investment, pumps out substantial revenues, employs at least tens of millions and indirectly helps to prolong the life of the Party. I am not talking about a party with funny hats, horns and poppers, but the Chinese Communist Party (CCP).

Technically, my prediction was wrong: the yuan was revalued last Thursday. But only minimally and to no significant effect.

And there was no threat -- no threat that was great enough to stimulate movement by the Chinese. What about the proposed Graham-Schumer bill in the American Congress? It would add a flat 27.5% tax on all Chinese imports. A fantastic idea, but only if your average WalMart shopper (and voter) could find pleasure by adding 27.5% to his bill at the checkout register. One can't imagine this bill passing.

Given the energy invested by the Americans in its full-court press, as well as the keen expectation that seemed to course electrically through world business communities, none can be delighted with the Chinese decision, perhaps not even the Chinese. So is this why the U.S has delayed review of CNOOC’s proposal to purchase Unocal? And CNOOC may now go "hostile?"

"Should the Chinese company fail to gain the backing of Unocal's board, it could explore other options including going hostile by taking an improved offer directly to shareholders. "At the end of the day, this is [Unocal] shareholders' call and not the board's call," says a person close to the deal. "The option is certainly there. Whether we use it depends on what happens in the next few days."

[Both links to FT require a subscription.]

What is the Bush administration to do, given the enormity of its failure to move the Chinese towards assumption of its notion of “free and fair trade?” China’s revaluation scheme is a threat. “We may move,” one might hear them say, “if we move at all, but we will move only in our interest and at the time of our choosing.” A very slight bow in acknowledgement of a demand, but never what might be perceived as 磕头 (“kow-tow”). Americans take notice.

Click the little triangle to listen to today's post.

American cabinet officials will travel to China to "press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday."

At long last, another Magical Mystery Tour. The mystery is that they should believe in the power of their magic at all. Chinese can be awfully stubborn when asked to take actions they see running contrary to their interests. (Was that too subtle?)

You may remember that the film was panned with gusto. We await the film of this trip with bated breath.

[Editor's Note: Given the restrictions upon the movement of money within China and across its borders, money laundering -- the transformation into apparently clean income of unlawfully transferred or earned money -- has become a commercial activity of great significance. This article from 21世纪经济报, which I have roughly translated, describes the methods used by a major player in that business, now imprisoned, that turn "black" money, as the Chinese call it, into mainstream wealth.]

Money Laundering

Special Report
Reporters: Zhong Wen-qing (Shanghai)

“Soak, wipe clean, wring dry” – and several hundred millions of dirty money become clean. Huang Guang-rui has not been in prison long. On December 4, China’s Anti-Money Laundering department announced that it had broken up one of Shanghai’s largest underground money laundering cases since the founding of the PRC, involving as much as 5 billion RMB (US$ 625 million).
　　
All international money laundering experts know that the soaking stage is the most delicate and easiest to be discovered. But Huang Guang-rui was fortunate. The Judiciary department has said that counter staff at two local banks he patronized weren’t alert.
　　
For nearly five years, Huang Xi-tian took his 15 siblings and disappeared into the border area between China and Vietnam.

They liked the feeling of flying at night. Each time, they loaded up their private airship with its five engines full of carefully chosen name brand cigarettes, like Southern Comfort and 555. [Private dirigibles in China? You bet.]

Flying from Situn over the Gulf of Tonkin, Huang Xi-tian traveled into Hepu County in Guangxi to a shrimp farm on the coast. Zheng Xu-ming owned the shrimp farm. Many nights, he waited for the airship to land on the dock at the farm. Radar had been installed on the roof of the shrimp farm’s office building, used specifically to monitor the patrol status of the Customs, Coast Guard and other police unit. After the goods had been safely unloaded, they were loaded onto trucks and transported to Guangzhou, Shenzhen, Kanjiang and other places, to be sold to many [buyers]. [Editor's Note: Does any reader know the Vietnamese name for the port of 四屯?]

Huang Xi-tian was very busy, flying often in the past five years, and having smuggled from Vietnam over 47,000 cigarette cartons across the border, they now had 170 million RMB (US$20 million) in hand. But with any more money than that, they were anxious – after all, it was dirty money.

Huang Guang-rui was a genuine money god for them. Only through him could the money become Huang Xi-tian’s legal income. Money laundering – the “dirty money industry” practiced by Huang Guang-rui, was becoming the world’s third largest business activity after foreign exchange and oil.

But now, the easy life was over. On August 23, 2006, the Guangxi People’s Supreme Court sentenced Huang Xi-tian and 15 defendants to prison, reprieved from death sentences, for various terms for commodity smuggling crimes

Moreover, Huang Guang-rui set a precedent – since the amendment of the criminal money laundering law of 1997, this was the first case in China where guilt had been established for money laundering with smuggling as its predicate crime.

TO BE CONTINUED

[Editor's note: Read Part 1 here.]

“Soaking”

This isn’t something everyone can do – laundering money requires contact with financial institutions so that cash can move up to the surface from underground, becoming legal income – it requires a series of complex techniques. The players in this industry have specialized knowledge and skills: lawyers, accountants, auditors, financial consultants and others.

Born in 1972, Huang Guang-rui was nonetheless considered a skilled mouthpiece. From 1990 to 1993, after studying at the Guangdong International School of Finance, he spent the next five years working in a bank branch in Shenzhen. After resigning in 1998, with an inside-out knowledge of the way banks move money, he became a expert money launderer.

His activities fit the classic laundering process – using the analogy of clothes-laundering, the money laundering cycle of “placement, layering and blending” became to them “soaking, wiping clean and wringing dry.
　　
Soaking is the first stage. Placing unlawful revenue into the financial system, into ordinary channels of distribution, is the first step. Important methods include the use of bank current accounts, postal money orders, travelers checks and other commonly circulated instruments.

Under ordinary circumstances, a very large bank deposit will attract the attention of regulators. Huang Guang-rui didn’t have much he could do about this. He used the most common technique – he opened tens of accounts in the local branches of two banks under many false names.

These accounts were patently preposterous. A few were opened using the altered IDs of his cousins. As an example, the account name of "Huang Juan-hua" was opened with a copy of photographs taken from an ID of Huang Guang-rui’s wife Huang Hai-xuan and sister-in-law Huang Xiao-yan, but with altered ID names, addresses and other pertinent information, The account name of "Huang Hui-juan" used Huang Hai-xuan’s photograph, but the ID name and number did not match hers.

Kanjiang’s “Boss Chen” shipped smuggled cigarettes into Guangzhou, Shenzhen and other designated stores, included cigarette counters and tea shops. Then those who were responsible for selling the smuggled cigarettes would figure their total revenue, and using banking institutions over a wide area, deposit that money over computer networks into the accounts Huang Guang-rui had established with falsified documents.

Experienced international money-launderers all know that the soaking stage is the most fragile, the most easily detected. But Huang Guang-rui was fortunate. The Judiciary has stated that the counter staff at two banks he patronized were insufficiently alert. Due diligence on the customer was halted at the auditing stage, becoming somewhat like a dead letter.

Identity auditing is but the first link. If one wishes to uncover soaking, one only needs to look very closely and often at the individual bank account.

Usually, a bank account opened with a false identity will show constant movement of large sums in and out. From July 1, 2003 to Feb. 27, 2004, the deposit account of "Huang Rui-juan" received 73 deposits for total of RMB 38.35 million (US$4.5 million). On August 8, 2003, however, that account showed 5 transactions amounting to over RMB 4 million (US$500,000).
　　
However, in developed areas such as Guangzhou and Shenzhen, a single account with flows exceeding several tens of millions and even over 100 million is not that unusual. This provided good camouflage for Huang Guang-rui.

TO BE CONTINUED

More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.

[Editor's Note: This is the final installment of our series on money laundering in China. Read Part 1 here. Part 2 here.]

“Wipe Clean” and “Wring Dry”

“Wiping clean” follows soaking -- allowing dirty money to distance itself from its unlawful origin. After the dirty money has entered the banking system, [they move it in and out of] accounts in as many different locations as possible or holding companies [they] establish, creating a complex web of financial transactions that render helpless any auditor and moving the dirty money farther and farther away from the criminal boss [of the original enterprise].

When Huang Guang-rui would set up a false account, the deposit usually came in and went out on the same day or the following. Huang Xi-tian and the others would split up and deposit money in the accounts set up by Huang Guang-rui. Huang Guang-rui would then move it on the same day or the following into the accounts of Gao Zhan-kun, Wang Li-Mei and others, leaving a small balance in the [transmitting] account.

Thereafter, the money would be transferred to Huang Guang-rui’s Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts. Once wrung dry, the dirty money had been washed clean, becoming money Huang Xi-tian could make use of without worry,

An important middle man, called “A-Nan,” who exchanged RMB for Hong Kong dollars and has not yet been made part of this case, moved Huang Guang-rui’s RMB across the border, completing the important step of wringing the money dry.

Actually, before the end of 2000, Huang Guang-rui didn’t know who A-Nan was. Later, he was introduced to A-Nan, who, through his gang, made money off of the forex spread across the border. But in the beginning, when the amount of RMB was small, A-Nan was never directly in touch with Huang Guang-rui.

The turning point came after 2002. The amount of smuggled money that was wired had become rather large, so Huang Guang-rui began direct contact with A-Nan so that [RMB could be] exchanged into Hong Kong dollars.

Between them, Huang Guang-rui and A-Nan established a fixed fee schedule. Huang Xi-tian and Huang Chu-dong called Huang Guang-rui to ask the daily rate (not the official rate, higher than the bank’s officially announced rate, and based on the supply of Hong Kong dollars at the time of the transaction), and paid Huang Guang-rui in RMB based on the rate Huang Guang-rui had provided. Huang Guang-rui would pay A-Nan based on the rate provided by A-Nan, making money off the forex spread.
　　
Changed into Hong Kong dollars, A-Nan would then transfer, via underground money-lending networks, to the Hong Kong Xinxing International Trade Company and YongXing International Trade Company accounts.

Judiciary organs have said that, since A-Nan has not been made part of this case, the exact methods of those who use underground money-lending networks to move money across border remain a mystery. Moreover, the details of the transacations between Huang Guang-rui and A-Nan are impossible to prove, as there is so little evidence.
　 　
Huang Guang-rui said that he only wished to give RMB to A-Nan. He guessed that A-Nan, in order to exchange currencies, may have had a relationship with a joint venture factory, to which A-Nan would have provided RMB in cash, in return for the joint venture (or foreign invested factory) would have placed the equivalent in Hong Kong dollars into the Hong Kong accounts.

In addition, Huang Guang-rui disclosed the activities of several other underground money lending networks – which directly exchanged RMB for Hong Kong dollars in cash and then moved it out into Hong Kong accounts. Chinese who gambled and won Hong Kong dollars on horse racing or the lottery in Hong Kong would give over their cash to A-Nan, who would then pay RMB to them in China. Outside of China, criminal elements who received smuggled goods would take Hong Kong dollars and within China pay RMB at a certain rate to people of a similar ilk.

Just like Huang Xi-tian and the others who profited from laundered, smuggled cash, there was still the originator of the smuggling – a Vietnamese trader name Zhang Ze-chun　　

For ease of moving money from one account to another, Huang Guang-rui and Zhang Ze-chun settled accounts via cellphone messaging that would send money from the Hong Kong accounts to Huang Xi-tian, and then to Huang Guang-rui. Block amounts of 500,000 or 1 million Hong Kong dollars were moved into Zhang’s Hong Kong accounts. The money arrived the same day. Zhang only shipped product once he had the money in hand.

By means of this cycle, the laundered cash entered the “wringing dry” stage, or perhaps one might say it had reached the “return of capital” stage. Just like legal capital, the laundered money was moved out to other destinations.

Well over 100 million RMB, dirty money earned through the smuggling efforts of Huang Xi-tian and 15 of his brothers and sisters, had been washed clean.　　　　　
　 　

Will Mr. Paulson become the Eveready Bunny of the forex world?

[Editor's note: The Eveready Bunny, for those readers who've not seen him on TV, is the brand mascot for a long-lived battery that "keeps going and going..."]

Tim Adams has left Treasury. Is Mr. Paulson about to announce a shift in Treasury's China policy?

Well, I guess it's settled. Everyone's decided the Chinese will revalue the RMB. So there you have it.

All the news that fits, we print:

"The People’s Bank of China said in a statement posted on its Web site that it would allow the currency, known as the yuan or renminbi, to rise or fall up to 0.5 percent in each day’s trading. The current daily limit is 0.3 percent."

WOW!

***

UPDATE (May 19, 2007): Here we go again!

"There was hope that broader cooperation was on the way, but a lot has changed in a few months. On the American side, with Democrats in control of Congress and a presidential campaign gearing up, there's a growing impatience with the pace of economic reform in China and a slew of anti-Chinese trade bills pending."

Does Miss Cha mean that under the Republicans progress could have been made?

"In recent months, official rhetoric on U.S.-China trade has grown increasingly hostile."

Rhetoric is an empty tide that ebbs and flows between China and the U.S. For all the hot air, the Americans have been entirely unwilling or incapable of acting. As I have written for years, empty American threats prove worthless in the face of Chinese political administrators who are just as canny and talented (or stupid incompetent, as the case may be). The money continues to roll in. How can the Chinese be expected to step in and stop it?

Now, however, ammunition has passed up to the front lines. The melamine-in-the-pet-food scandal (see my post and podcast) has already galvanized the American consumer to avoid Chinese food products, and the FDA's response appears to be earnest. Will an American negotiator in a position of substantial authority make the link between the food impurities case and the trade war at large?

UPDATE (May 20, 2007): This morning's Washington Post picks up on this thread. The strong language of this front-page piece made me stutter for a second - I thought it was an editorial!

For years, U.S. inspection records show, China has flooded the United States with foods unfit for human consumption. And for years, FDA inspectors have simply returned to Chinese importers the small portion of those products they caught -- many of which turned up at U.S. borders again, making a second or third attempt at entry.

Now the confluence of two events -- the highly publicized contamination of U.S. chicken, pork and fish with tainted Chinese pet food ingredients and this week's resumption of high-level economic and trade talks with China -- has activists and members of Congress demanding that the United States tell China it is fed up.

Chinese food imports are a serious public health concern. Some have begun to see the extraordinary value of the pet food scandal in the context of trade negotiations. Let us hope the American negotiators are hammering away at it with the clobberingest mallet they can find.

UPDATE (May 21, 2007): Bloomberg:

``Paulson, as somebody who understood China, was trying to reach a conciliatory approach,'' says Nobel laureate Joseph Stiglitz, an economics professor at Columbia University in New York. ``The question is, has the political pressure taken away his freedom to move?''

With respect to Mr. Stiglitz, that is not the question. Rather, it is the validity of conciliation in negotiation. Conciliation is ineffective with Chinese, unless paired with its subtle black sheep twin brother, Threat.

And neither can be made of straw -- they will both go up in flame. As we've written in the past, one hand must caress while the other is held ready to strike.

WSJ's article on Treasury Secretary Hank Paulson notes his frustration, not in dealing with Chinese officials, but with Americans. With respect to Social Security:

Mr. Paulson says it's "frustrating to be in an environment where well-meaning people on both sides of the aisle see there's a problem" but don't have the political will to act. "I've been asking people to come to the table, saying all options are on the table, and I'm getting a little tired of playing solitaire."

As to China, he appears to think that patience will, over time, result in the gains he is looking to achieve.

Under pressure to take a tougher stance, the administration has unilaterally imposed sanctions on China for alleged improper pricing of exports, and in a World Trade Organization complaint, has accused China of lax enforcement of copyright violations. Mr. Paulson didn't oppose the moves, although he knew it would be an obstacle to discussions, Treasury officials say. The Chinese reacted angrily, and Mr. Paulson spent about four hours on the phone with Ms. Wu to smooth over tensions, people familiar with the conversation say.

A quote verbatim would have been more revealing than this paraphrase. Did Mr. Paulson really say that the WTO IP complaint was an obstacle to his discussions with China? Isn't it, instead, a valuable tool of negotiation with China? The article thus leaves the reader wondering about his priorities and methods.

UPDATE (May 24, 2007): Chinese authorities have proven as incapable of restraining its prolific counterfeiting as American federal departments were of providing humanitarian assistance during hurricane Katrina.

On Tuesday, Ms. Wu said that efforts by some to “politicize” the Chinese-American relationship were “absolutely unacceptable.” This was taken as a reference to the American challenges to Chinese subsidies of exports and piracy of DVDs.

IP is precisely the kind of issue that the U.S. can not let go of. US representatives in China have been banging away on IP -- with words alone -- for at least 4 years, but it is chopping a redwood with an invisible axe.

The hot air -- the new Trade Winds? -- that has blown forth and back between these two Great Nations has accomplished scant little over these many years.

Action -- even if it is only symbolic -- will speak far louder. [Symbolic acts are typical of Chinese political tradition, e.g. to disarm an enemy by executing the leaders of the group and not the entire group itself.]

Susan C. Schwab, the United States trade representative, speaking at the conclusion of the talks Wednesday, made it clear that her own session with Chinese leaders had done little to narrow differences on these issues. “Suffice it to say we had a healthy exchange of views,” she said.

Meaning that the banquet was terrific.

But this quote gives us serious gastric distress:

Mr. Paulson said he was impatient for more concrete results himself and hoped there would be further progress before the third session of the dialogue, in Beijing in December.

“I have no doubt that we’re getting more results than we would have without this dialogue,” he said.

Bloomberg:

``China will continue to reform its exchange rate on its own initiative, gradually,'' Wu said at a dinner in Washington after two days of talks with U.S. Treasury Secretary Henry Paulson that yielded only minor agreements and failed to quell calls in Congress for sanctions against China.

Over the past six years, we have often written that China will hold fast on her rate of exchange with the U.S. dollar. No benefit accrues to China were she to do otherwise. And here Ms. Wu has told Mr. Paulson so to his face in public on American soil. [American pols must be jumping up and down in choler extremis.] You can't go much higher than Wu Yi. Is another indication necessary?

And yet the exchange rate is neither the problem, nor the solution. The effect of a revaluation? Alan Greenspan testified the following to Congress on June 23, 2005:

Some observers mistakenly believe that a marked increase in the exchange value of the Chinese renminbi (RMB) relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States. I am aware of no credible evidence that supports such a conclusion.

Americans must recognize that making money in China is a rough business -- historically so and we must not expect change. It proceeds according to invisible rules. There are no maps and many dead-ends. The weather changes constantly and without notice.

Americans who wish to export more must adapt to the Chinese business environment with the same alacrity, resourcefulness and self-reliance with which their Chinese counterparts often astonish them. They will have to work a lot harder and take less of a profit doing so. Some have been able to do this. Few do it well. Most spend more time complaining. But we see the value of complaint -- a terrific banquet, followed by the exclamation, "Stuff it!"

Chinese Vice-Premier Tells U.S. Treasury Secretary where to get off. Click the little triangle to listen.

Once again the helpless cry in the Western wilderness. Won't China allow the Yuan to "strengthen at a faster rate?" No, indeed. How is doing so in China's interest?

The movers and shakers of the so-called great economic powers, who have, it is said, the power over the purses that pay for imported product -- are powerless to affect any change either at home or abroad, despite ostensible regulatory control and direct market influence. This should not surprise anyone.

The rate of exchange has been the subject of heated discussion for over a decade. It can be considered a scientific principle that the amount of hot air expended upon it is inversely proportional to the movement engendered.

Traders, journalists, commerce department officials, Fortune 500 executives, Taiwanese investors -- all have averred to me over the past decade their strong belief that a policy change is imminent. And none has come along. I have contradicted my colleagues for years their sanguine approach to little avail. Hope springs eternal. One should, instead, bite into the proverbial Apple for a look outside the dreamy Eden-world to the hard analysis of interests （利害關係）. How does devaluation figure into China's economic interest? Stay away from the theoretical and answer with supreme practicality. It does not.

For now, China is signaling little willingness to bow to pressure. Central bank Deputy Governor Wu Xiaoling said Oct. 19 China won't hurry to alter its exchange-rate system, saying the country is already ``moving in a correct direction and in a smooth manner.''

"For now" is about as pregnant as one can get without knowing you've just given birth.

Riddle me this, Caped Crusader:

What American official puts pressure on the yuan by not putting pressure on the yuan? This just in:

"What we've said before in the report ... is if we were to designate China as a manipulator, the remedy would be to negotiate with China directly and through multilateral bodies including the IMF, which is exactly what we've been doing for some time," Paulson said. "We've been making the case as strongly as we know how."

In other words, the U.S. Treasury Secretary will not officially label China as a currency manipulator, but will continue to act as if it had. One supposes that this is how the old China hands in the US administration believe it has to be done -- avoid public shaming, put forth rosy statements, fight the good fight in private. And yet, where are the results? Can any be expected, except marginally, when change would directly harm China's interest?

Jim Rogers, megamillionaire, has given up on the United States: China is the promised land. (He's flogging a book.) Who can fault the investing expertise of one who has made more money than we ever will? Martin Howell of Reuters, for one, in an article succinctly entitled, Jumping on the China Bandwagon with Jim Rogers." Mr. Howell writes of Mr. Rogers:

He counsels us to "get out of the dollar, teach your children Chinese and buy commodities" and declares that it is scarier to have savings in the U.S. stock market than to have some of them in China.

These suggestions, in and of themselves, are frightening enough, but Mr. Rogers further recommends that we attempt to understand the Chinese by eating Chinese take-out.

"Now is the time to engage China and all things Chinese," he says. If you can't go for a visit, take a class in tai chi and then learn about Chinese medicine, watch Chinese movies, Rogers suggests. "The point is to develop a clear sense of how Chinese people view the world and lead their lives. Try to figure out how China's consumers will spend their hard-earned cash and where they might put it to grow."

Understanding how Chinese "view the world and lead their lives" is essential to productive interaction with them, but one can not rise above shallow faux-knowledge gleaned from Western-adored emblems of Chinese culture, like tai chi, without learning the language or living and working with Chinese on a daily basis. (I have come across self-professed experts on China who can not even speak the language fluently -- a defect I find scandalous.)

A little knowledge is a dangerous thing. It is better to remain entirely within one's upbringing than to believe it possible to skim the surface of a vastly different set of assumptions about the world and think one has the keys to the kingdom. Ask yourself: is it possible for a foreigner to understand your conception of the world from a single visit to your nation's capital, or a viewing of your latest hit film, or the reading of a holy book?

Once again. Hope springs eternal. But by this time -- after years of negotiations, promises and punditry -- no one should be surprised and none should claim that it will happen soon.

"就是今天，台灣本島都可自由兌換人民幣了，估計各銀行備妥五億以上人民幣等著給民眾換。根據規定，買賣人民幣跟其他外幣一樣，只要帶著身分證、護照等身份證明文件即可，但每人每次仍有兩萬元人民幣的上限。不過，開放初期受限於貨源，部分分行可能只買不賣，民眾前往銀行結匯前，不妨先打個電話問清楚，免得白跑一趟。"

[Editor's Translation: Today, the RMB is freely convertible throughout Taiwan, and it is estimated that banks have prepared 500 million RMB for that purpose. Regulations make NT-RMB conversion the same as conversion with other foreign currencies, requiring only an ID, passport or similar documentation of identity. with 20,000 RMB at most converted in any one transaction. However, because of the limited supply at first, some bank branches may only be buying and not selling at this time. Customers should call ahead for availablity before traveling to their branch.]

Read more here and here. [In Chinese.}

Details have emerged in the CITIC Pacific forex scandal:

Citic Pacific Ltd.'s attempt to manage currency risk means the Chinese steelmaker and property developer has four times more money riding on the Australian dollar than it earned last year.

The unit of China's largest state-owned investment company has contracts committing it to buy as much as A$9.44 billion ($6.3 billion) of the currency, according to an Oct. 20 statement. That's more than quadruple Citic Pacific's market value yesterday and compares with 2007 net income of HK$10.8 billion ($1.4 billion).

More here.

As worldwide currency traders continued to deleverage risky positions -- with greater volatility and uncertainty than ever done before -- we will certainly see many more Chinese currency investments unwind with significant losses to major overseas investment subsidiaries.

What you know, but the Hong Kong subsidiary of China Railway Group has just announced currency trading losses of $278 million.

Victor Shih's always engrossing Elite Chinese Politics & Political Economy blog talks about the Chinese bail-out:

There is a rumor that Chinese Academy of Social Sciences, a government think-tank, came up with a plan to set up a government fund to buy up Chinese stocks if the market falters drastically.

Read it all here.

Paulson's Legacy: Geithner:

Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency,

Again? Since 2006, we've discussed Treasury's desire to move the RMB, but, by now, it's become a dreadful bore. [Search this page or click the Foreign Exchange category of this blog.]

Perhaps Washington believes that China has been weakened and leverage may be exerted where popular opinion supports the administration. Watch out for the push-back!

UPDATE (8 hours later):

Sure enough, the Chinese have fired back.

A Chinese ministry Saturday strongly denied Obama administration claims that China "manipulates" its currency, as the first contact between the new administration and China takes a markedly sour tone.

[UPDATE (March 26, 2009): The American response here and here.]

Zhou Xiaochuan (周小川), Governor of the People's Bank of China, has proposed a supranational currency to which national currencies shall be linked and valued according to a system of "rules." Remember China's concern (panic?) over its enormous U.S. dollar reserves and investments in U.S. Treasuries [See: China's Holdings of U.S. Securities: Implications for the U.S. Economy] The New York Times provides a brief overview; WSJ here and here.

Pie in the sky. From WSJ:

Large, deep, and highly traded markets involving a particular currency "don't spring up spontaneously just because the Chinese central bank governor suggests this would be a good idea," says Barry Eichengreen, an economist at the University of California at Berkeley.

This is a shot over the bow. My initial reaction is that, given the statements of Treasury Secretary Geithner, this public announcement of an attack on the dominance of the US dollar indicates a worsening government-to-government relationship in economic matters between the U.S. and China.

Zhou Xiaochuan's comments in full appear below:

Reform the International Monetary System

Zhou Xiaochuan

The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.

Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.

I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.

Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand,the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand,they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.

When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.

II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.

2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.

III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all.

The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.

Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.

The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries' demand for a reserve currency.

Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.

IV. Entrusting part of the member countries' reserve to the centralized management of the IMF will not only enhance the international community's ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR.

1. Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international "supervisor" on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries' reserves.

2. The centralized management of its member countries' reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.

关于改革国际货币体系的思考
周小川

此次金融危机的爆发与蔓延使我们再次面对一个古老而悬而未决的问题，那就是什么样的国际储备货币才能保持全球金融稳定、促进世界经济发展。历史上的银本位、金本位、金汇兑本位、布雷顿森林体系都是解决该问题的不同制度安排，这也是国际货币基金组织（IMF）成立的宗旨之一。但此次金融危机表明，这一问题不仅远未解决，由于现行国际货币体系的内在缺陷反而愈演愈烈。

理论上讲，国际储备货币的币值首先应有一个稳定的基准和明确的发行规则以保证供给的有序；其次，其供给总量还可及时、灵活地根据需求的变化进行增减调节；第三，这种调节必须是超脱于任何一国的经济状况和利益。当前以主权信用货币作为主要国际储备货币是历史上少有的特例。此次危机再次警示我们，必须创造性地改革和完善现行国际货币体系，推动国际储备货币向着币值稳定、供应有序、总量可调的方向完善，才能从根本上维护全球经济金融稳定。

一、此次金融危机的爆发并在全球范围内迅速蔓延，反映出当前国际货币体系的内在缺陷和系统性风险

对于储备货币发行国而言，国内货币政策目标与各国对储备货币的要求经常产生矛盾。货币当局既不能忽视本国货币的国际职能而单纯考虑国内目标，又无法同时兼顾国内外的不同目标。既可能因抑制本国通胀的需要而无法充分满足全球经济不断增长的需求，也可能因过分刺激国内需求而导致全球流动性泛滥。理论上特里芬难题仍然存在，即储备货币发行国无法在为世界提供流动性的同时确保币值的稳定。

当一国货币成为全世界初级产品定价货币、贸易结算货币和储备货币后，该国对经济失衡的汇率调整是无效的，因为多数国家货币都以该国货币为参照。经济全球化既受益于一种被普遍接受的储备货币，又为发行这种货币的制度缺陷所害。从布雷顿森林体系解体后金融危机屡屡发生且愈演愈烈来看，全世界为现行货币体系付出的代价可能会超出从中的收益。不仅储备货币的使用国要付出沉重的代价，发行国也在付出日益增大的代价。危机未必是储备货币发行当局的故意，但却是制度性缺陷的必然。

二、创造一种与主权国家脱钩、并能保持币值长期稳定的国际储备货币，从而避免主权信用货币作为储备货币的内在缺陷，是国际货币体系改革的理想目标

1、超主权储备货币的主张虽然由来以久，但至今没有实质性进展。上世纪四十年代凯恩斯就曾提出采用30种有代表性的商品作为定值基础建立国际货币单位 “Bancor”的设想，遗憾的是未能实施，而其后以怀特方案为基础的布雷顿森林体系的崩溃显示凯恩斯的方案可能更有远见。早在布雷顿森林体系的缺陷暴露之初，基金组织就于1969年创设了特别提款权（下称SDR），以缓解主权货币作为储备货币的内在风险。遗憾的是由于分配机制和使用范围上的限制，SDR 的作用至今没有能够得到充分发挥。但SDR的存在为国际货币体系改革提供了一线希望。

2、超主权储备货币不仅克服了主权信用货币的内在风险，也为调节全球流动性提供了可能。由一个全球性机构管理的国际储备货币将使全球流动性的创造和调控成为可能，当一国主权货币不再做为全球贸易的尺度和参照基准时，该国汇率政策对失衡的调节效果会大大增强。这些能极大地降低未来危机发生的风险、增强危机处理的能力。

三、改革应从大处着眼，小处着手，循序渐进，寻求共赢

重建具有稳定的定值基准并为各国所接受的新储备货币可能是个长期内才能实现的目标。建立凯恩斯设想的国际货币单位更是人类的大胆设想，并需要各国政治家拿出超凡的远见和勇气。而在短期内，国际社会特别是基金组织至少应当承认并正视现行体制所造成的风险，对其不断监测、评估并及时预警。

同时还应特别考虑充分发挥SDR 的作用。SDR具有超主权储备货币的特征和潜力。同时它的扩大发行有利于基金组织克服在经费、话语权和代表权改革方面所面临的困难。因此，应当着力推动 SDR的分配。这需要各成员国政治上的积极配合，特别是应尽快通过1997年第四次章程修订及相应的SDR分配决议，以使1981年后加入的成员国也能享受到SDR的好处。在此基础上考虑进一步扩大SDR的发行。

SDR的使用范围需要拓宽，从而能真正满足各国对储备货币的要求。

●建立起SDR与其他货币之间的清算关系。改变当前SDR只能用于政府或国际组织之间国际结算的现状，使其能成为国际贸易和金融交易公认的支付手段。

●积极推动在国际贸易、大宗商品定价、投资和企业记账中使用SDR计价。不仅有利于加强SDR的作用，也能有效减少因使用主权储备货币计价而造成的资产价格波动和相关风险。

●积极推动创立SDR计值的资产，增强其吸引力。基金组织正在研究SDR计值的有价证券，如果推行将是一个好的开端。

●进一步完善SDR的定值和发行方式。SDR定值的篮子货币范围应扩大到世界主要经济大国，也可将GDP作为权重考虑因素之一。此外，为进一步提升市场对其币值的信心，SDR的发行也可从人为计算币值向有以实际资产支持的方式转变，可以考虑吸收各国现有的储备货币以作为其发行准备。

四、由基金组织集中管理成员国的部分储备，不仅有利于增强国际社会应对危机、维护国际货币金融体系稳定的能力，更是加强SDR作用的有力手段

1、由一个值得信任的国际机构将全球储备资金的一部分集中起来管理，并提供合理的回报率吸引各国参与，将比各国的分散使用、各自为战更能有效地发挥储备资金的作用，对投机和市场恐慌起到更强的威慑与稳定效果。对于参与各国而言，也有利于减少所需的储备，节省资金用于发展和增长。基金组织成员众多，同时也是全球唯一以维护货币和金融稳定为职责，并能对成员国宏观经济政策实施监督的国际机构，具备相应的专业特长，由其管理成员国储备具有天然的优势。

2、基金组织集中管理成员国储备，也将是推动SDR作为储备货币发挥更大作用的有力手段。基金组织可考虑按市场化模式形成开放式基金，将成员国以现有储备货币积累的储备集中管理，设定以SDR计值的基金单位，允许各投资者使用现有储备货币自由认购，需要时再赎回所需的储备货币，既推动了SDR 计值资产的发展，也部分实现了对现有储备货币全球流动性的调控，甚至可以作为增加SDR发行、逐步替换现有储备货币的基础。(完)

A Columbia University economist known for his extraordinary conclusions -- some right -- evidently knows something everybody else does not.

The Chinese yuan is preparing to overtake the US dollar as the world's reserve currency, economist Nouriel Roubini has warned.

Read his article and several comments here. Frankly, it doesn't look like anything more than an educated guess. What support is there for such an extraordinary statement? Certainly none in the article itself. And the RMB isn't even fully convertible -- and I don't believe will ever become so. Convertibility -- essentially, the making of a truly internationalized currency -- has been a subject of discussion and prognostication for 30 years, ever since China used foreign exchange certificates in the early days after the initial economic reforms of 1978. How is it in the interests of the Chinese government and Chinese commerce to make it fully convertible? This is a question that no one seems to address.

Already, some are hitching on to a star in the hopes of its ascending to the extraordinary heights. I well remember the reports and predictions of the supremacy of the Japanese yen in the 1980s.

As proof of this gentleman's economic wisdom, writers consistently cite his previous prediction of financial collapse. But then again, I know quite a few non-economists who predicted the same thing!

It appears that cross-border trade between Hong Kong and mainland China may be settled in yuan as early as next month. [Thanks to Frank Caruso at the Chinatex blog.]

Note the limitations:

The State Council said early in April that it would allow traders in Shanghai, Guangzhou, Shenzhen, Zhuhai and Dongguan to settle their cross-border business in yuan.

In December, the council said Hong Kong and Macau would be permitted to use yuan for the settlement of trade with designated partners in Guangdong and the Yangtze River Delta under a pilot scheme. Mr Zhou said how many mainland enterprises participated in the scheme would depend on the governments of the two delta regions but “there will be at least a few hundred”.

Mr Yam said all Hong Kong exporters and importers could settle trade with their designated mainland counterparts, but the scheme could only be implemented after the PBOC issued administrative guidelines.

One has been reading pronouncements about convertibility since the early 1980s. This writer is still unsure that full convertibility will ever take place, if only because -- without consideration of economic or financial reasons -- convertibility takes substantial control out of the hands of those who have enjoyed it for so many years. This project, at least described by the article, appears to be a beta test.

I've been busy preparing to open a second location for my law practice and have not written much. But let me give you something to read in the meantime:

After 11 years of trial, New Taiwan Dollar/RMB exchange, based in bank branches and open to the public, has expanded to the entire province of Fujian. Very doubtful that this is of much importance to any but the tourist, as, evidently, only smaller quantities of cash may be exchanged, Surely not benefiting Taiwanese manufacturers or investors. However, this appears to be a further indication of the generally positive interaction between government officials in Taipei and Beijing. Perhaps this will put a dent in the black-market operators who often hang out around local bank branches offering slightly better rates of exchange than the branches do themselves.

A Sina.com article here.

More hollering about the value of the Yuan. This is simply Washington window dressing on the more profound problem to which none of the "best and brightest" supposed to be leading this country seems to care deeply enough about to create a solution for. Are there any newly instituted and significant incentives aimed at encouraging American business to bring manufacturing back onshore? (That was a rhetorical question.)

Richard McCormack, editor of Manufacturing & Technology News, writes:

The United States is not a desirable place to build a new semiconductor wafer fabrication (fab) plant. Such plants are massive, costing upwards of $8 billion and generating thousands of direct and indirect high-paying jobs, spinoff revenue for local communities and massive investments in research, equipment and materials. Semiconductors sit at the top of the electronics industry pyramid. The United States invented the technology, but it's become a small player as measured by global production.

In 2009, 16 fabs began construction throughout the world. One of them was in the United States, according to Daniel Tracy, senior director of industry research and statistics at Semiconductor Equipment Materials International.

...

China led the world last year in new semiconductor factory construction, with six fabs, followed by Taiwan with five, and Korea, Japan, the European Union and Southeast Asia, all with one apiece.

...

The United States does lead the world in one category, however: closures. In 2009, 27 fabs closed worldwide, with 15 of them in the United States (followed by four in Europe, four in Japan, two in China, one in Korea and one in Southeast Asia). The number of closures last year almost doubled from the previous year, when 15 fabs were shut down worldwide, again, with the largest number in the United States (at four).

Why is the United States losing out on the next phase of the semiconductor boom? "It's not direct labor," says George Scalise, president of the Semiconductor Industry Association. "It's not materials -- they cost the same everywhere. If you go down the list of expenses, every-thing is the same, except for tax policies and subsidies." [Emphasis added.]

Read the rest here.