March 6, 2008
Currency Redux, Again
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.
Posted by Richard at 4:13 PM | Comments (0)December 26, 2007
The Seductive Strains of the China Bandwagon
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?
Posted by Richard at 8:43 PM | Comments (0)December 19, 2007
Treasury Secretary Paulson: China is Not a Currency Manipulator
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?
Posted by Richard at 9:09 PM | Comments (0)November 16, 2007
Demands for Currency Revaluation Ad Infinitum
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.
Posted by Richard at 1:10 PM | Comments (0)May 25, 2007
Audio: Wu to Paulson - Stuff it!
Chinese Vice-Premier Tells U.S. Treasury Secretary where to get off. Click the little triangle to listen.
Wu to Paulson: Stuff It!
``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!"
Posted by Richard at 11:34 AM | Comments (1)May 22, 2007
US Treasury Secretary Critical of the Home Crowd, the new Trade Winds and more...
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.Everyone expects results. And therein lies the problem. Posted by Richard at 2:03 PM | Comments (0)
May 18, 2007
US Treasury Dept. Efforts Move Exchange Rate by 67%! Melamine in the Pet Food, Trade Talks and More
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.
Posted by Richard at 8:13 PM | Comments (3)February 19, 2007
More on the Value of the RMB
Well, I guess it's settled. Everyone's decided the Chinese will revalue the RMB. So there you have it.
Posted by Richard at 12:26 PM | Comments (0)February 2, 2007
U.S. Treasury China Personnel Change: Adams Leaves Office
Tim Adams has left Treasury. Is Mr. Paulson about to announce a shift in Treasury's China policy?
Posted by Richard at 1:46 PM | Comments (0)February 1, 2007
Once More, Paulson Again Restates American Position on Renminbi Revaluation, For A Further Time, Anew...
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..."]
Posted by Richard at 1:06 PM | Comments (0)December 29, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 3)
[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.
December 20, 2006
Audio: Renminbi Redux - Have They Begun to Circle the Wagons
More renminbi revaluation silliness from Washington... Click the little triangle to listen to today's post.
December 15, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part 2)
[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$500,000).
However, in developed areas such as Guangzhou and Shenzhen, a single account with flows exceeding several tens of millions and even over 100 million is not that unusual. This provided good camouflage for Huang Guang-rui.
TO BE CONTINUED
December 14, 2006
Money Laundering in China: The Case of Huang Guang-rui (Part I)
[Editor's Note: Given the restrictions upon the movement of money within China and across its borders, money laundering -- the transformation into apparently clean income of unlawfully transferred or earned money -- has become a commercial activity of great significance. This article from 21世纪经济报, which I have roughly translated, describes the methods used by a major player in that business, now imprisoned, that turn "black" money, as the Chinese call it, into mainstream wealth.]
Money Laundering
Special Report
Reporters: Zhong Wen-qing (Shanghai)
“Soak, wipe clean, wring dry” – and several hundred millions of dirty money become clean. Huang Guang-rui has not been in prison long. On December 4, China’s Anti-Money Laundering department announced that it had broken up one of Shanghai’s largest underground money laundering cases since the founding of the PRC, involving as much as 5 billion RMB (US$ 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
November 23, 2006
US Officials To Embark on Magical Mystery Tour
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.
Posted by Richard at 12:04 PM | Comments (0)July 26, 2005
Audio: The Chinese Yuan Revaluation Scheme
Click the little triangle to listen to today's post.
The Chinese Yuan Revaluation Scheme: When An Offer of Appeasement is a Veiled Threat
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.
Posted by Richard at 2:34 PM | Comments (0)July 21, 2005
China Removes Yuan Peg
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.
Posted by Richard at 12:43 PM | Comments (0)June 23, 2005
Greenspan and Snow Duke It Out Before a Cantakerous Senate
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.
Posted by Richard at 8:37 PM | Comments (0) | TrackBackMay 17, 2005
Late-breaking: U.S. Warns China On Currency
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]
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.]
Posted by Richard at 8:14 PM | Comments (0) | TrackBackApril 7, 2005
New Regulations Curtail Individual Outbound Investment
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 1, 2005)
In a commentary on the subject of restrictions surrounding inbound (as opposed to outbound) investment, Doug Markel, an attorney with Freshfields in Beijing writes:
"Sceptics believe the government’s real intent is to put an end to offshore investments in Chinese businesses. What troubles the Chinese authorities most is the “valuation gap” in these deals. Typically, owners move their interests offshore at net asset value, before selling them at a significantly higher price.
The proceeds of such deals – including capital gains and significant foreign exchange earnings – are beyond the reach of Chinese tax and monetary authorities. The Chinese government has lost track of just how much value is leaving the country through these transactions." [Pay site.]
Posted by Richard at 4:51 PM | Comments (2) | TrackBackMarch 11, 2005
Jumping Into the Abyss
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.
Posted by Richard at 3:04 PM | Comments (1) | TrackBack
