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– China wins plaudits for keeping RMB (―yuan‖’) fixed
• while all its neighbors are devaluing.
• 1995-2005: China continues to peg
– for 10 years – at 8.28 RMB/$.
– In the first Reports to Congress on International Economics & Exchange Rate Policy, Korea & Taiwan PoC were found to be guilty of manipulation,
• while Singapore & Hong Kong SAR ―got off with a warning.‖ • China was named in early 1990s.
-- Li Ruogu, Deputy Governor, People’s Bank of China, Dalian, May 2004
3
Historical timeline of currency diplomacy
• 1973: End of Bretton Woods era.
– Major currencies switch from fixed to floating. The rest keep their pegs.
4
Timeline, continued
• 1988: The Omnibus Trade
& Competitiveness Act
mandates the US Treasury report to Congress biannually on whether trading partners were manipulating currencies.
– Section 3004 requires the Treasury to ―consider whether countries manipulate the rate of exchange between their currency and the US $ for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.'' – The US must hold talks with governments deemed to be breaking rules.
– as reflected in either capital flows (see Prasad & Wei) – or non-deliverable forward price (see appendix graph).
• Feb. 2005: Senators Schumer & Graham propose first of bills to impose (WTO-illegal) tariffs of 27.5 % against all Chinese goods if China does not substantially revalue its currency.
• 1977:
IMF members agree that each shall ―avoid manipulating exchange rates … in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.‖
6
Timeline, continued: US pressure
• Oct. 2003: Treasury Secretary Snow begins to ―browbeat‖ China to allow appreciation.
– Treasury Report: RMB merits concern & talks – Speculators in financial markets start to bet appreciation.
• 1983-84: ¥/$ Agreement. 1985: Plaza Accord.
– Japan, US & others cooperate to bring down overvalued $, esp. vs. ¥
• 1987-89:
– Louvre Agreement: $ depreciation halted. – Big bubbles in Japan’s equity & real estate markets, – followed by crash, & severe Japanese stagnation in 1990s.
Topics to be covered
(I) Historical timeline of exchange rate diplomacy
(II) What is in China’s interest?
(III) What is in the interest of the US & Rest of World? (IV) Shifting power relationships
– Appendices:
• • • • U.S. Treasury biannual reports on currency manipulation The current account imbalances The internationalization of the RMB Technical appendices
[Principle (A) of the ―1977 Decision on Surveillance over Exchange Rate Policies,‖ and Sect.1, Clause 3, of Article IV amended in 1978.]
– In practice, the IMF almost never pressures countries to revalue their currencies upward; • It just pressures deficit countries to devalue.
China resumes very rapid growth
– in response to domestic demand stimulus + renewed exports – China is now a major engine of growth in world economy. – Danger of overheating returns: esp. real estate bubble.
8
Timeline,
continued:
Exchange rate
• July 2005: China announces a new policy,
– Immediate 2.1% revaluation, – Followed by ―managed float‖: controlled appreciation, supposedly against an unspecified basket of currencies. – But, as often, de jure exchange rate regime ≠ de facto.
• Estimation of true regime reveals:
– $ link did not even begin to loosen until 2006. – By 2007, implicit basket had shifted some weight onto other currencies, especially the €. – RMB appreciates against the $ from 2006 to 2008,
• because € does.
9
The magnitude of daily movements vs. $ increased in the spring of 2006,
.004
Changes in CNY per USD over Time: 07/22/05-1/8/2007
2
Historical timeline
“I have listened to both sides of this debate. Here is what I think. I think those who call for a fixed exchange rate are right in the short run. And those who call for a floating exchange rate are right in the long run. How long is the short run, you ask? You must understand. China is 8000 years old. So when I say, short run, it could be 100 years.”
Timeline, continued: China’s macroeconomy • 2004-07: • 2005-06:
Rapid growth puts China into Excess Demand.
Despite large balance of payments surpluses, PBoC sterilization of reserve inflows prevents excessive money growth & inflation. Money becomes excessive. – Inflation becomes a serious concern. – Shanghai stock market experiences a bubble.
• 2007-08: Sterilization finally falters: • Mid-2008 – early 2009: • Mid-2009 – 2011:
Worst of the global recession hits.
– China loses 26% of exports – Growth slows; danger of overheating disappears.
5
Timeline, continued: Exchange rate • Jan. 1994: China ห้องสมุดไป่ตู้evalues its official rate,
– unifying its dual exchange rate system.
• 1997-98: East Asia crisis.
– Subsequent versions, by Baucus-Grassley and others substitute the phrase ―currency misalignment‖ in place of ―unfair manipulation‖ to ease standard of proof.7
China-US Currency Issues
Jeffrey Frankel
Harpel Professor
CHINA FUTURE LEADERS,
10 a.m., Bell Hall, January 17, 2011
Revised from CLD Program, June 8, 2010;
• while all its neighbors are devaluing.
• 1995-2005: China continues to peg
– for 10 years – at 8.28 RMB/$.
– In the first Reports to Congress on International Economics & Exchange Rate Policy, Korea & Taiwan PoC were found to be guilty of manipulation,
• while Singapore & Hong Kong SAR ―got off with a warning.‖ • China was named in early 1990s.
-- Li Ruogu, Deputy Governor, People’s Bank of China, Dalian, May 2004
3
Historical timeline of currency diplomacy
• 1973: End of Bretton Woods era.
– Major currencies switch from fixed to floating. The rest keep their pegs.
4
Timeline, continued
• 1988: The Omnibus Trade
& Competitiveness Act
mandates the US Treasury report to Congress biannually on whether trading partners were manipulating currencies.
– Section 3004 requires the Treasury to ―consider whether countries manipulate the rate of exchange between their currency and the US $ for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.'' – The US must hold talks with governments deemed to be breaking rules.
– as reflected in either capital flows (see Prasad & Wei) – or non-deliverable forward price (see appendix graph).
• Feb. 2005: Senators Schumer & Graham propose first of bills to impose (WTO-illegal) tariffs of 27.5 % against all Chinese goods if China does not substantially revalue its currency.
• 1977:
IMF members agree that each shall ―avoid manipulating exchange rates … in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.‖
6
Timeline, continued: US pressure
• Oct. 2003: Treasury Secretary Snow begins to ―browbeat‖ China to allow appreciation.
– Treasury Report: RMB merits concern & talks – Speculators in financial markets start to bet appreciation.
• 1983-84: ¥/$ Agreement. 1985: Plaza Accord.
– Japan, US & others cooperate to bring down overvalued $, esp. vs. ¥
• 1987-89:
– Louvre Agreement: $ depreciation halted. – Big bubbles in Japan’s equity & real estate markets, – followed by crash, & severe Japanese stagnation in 1990s.
Topics to be covered
(I) Historical timeline of exchange rate diplomacy
(II) What is in China’s interest?
(III) What is in the interest of the US & Rest of World? (IV) Shifting power relationships
– Appendices:
• • • • U.S. Treasury biannual reports on currency manipulation The current account imbalances The internationalization of the RMB Technical appendices
[Principle (A) of the ―1977 Decision on Surveillance over Exchange Rate Policies,‖ and Sect.1, Clause 3, of Article IV amended in 1978.]
– In practice, the IMF almost never pressures countries to revalue their currencies upward; • It just pressures deficit countries to devalue.
China resumes very rapid growth
– in response to domestic demand stimulus + renewed exports – China is now a major engine of growth in world economy. – Danger of overheating returns: esp. real estate bubble.
8
Timeline,
continued:
Exchange rate
• July 2005: China announces a new policy,
– Immediate 2.1% revaluation, – Followed by ―managed float‖: controlled appreciation, supposedly against an unspecified basket of currencies. – But, as often, de jure exchange rate regime ≠ de facto.
• Estimation of true regime reveals:
– $ link did not even begin to loosen until 2006. – By 2007, implicit basket had shifted some weight onto other currencies, especially the €. – RMB appreciates against the $ from 2006 to 2008,
• because € does.
9
The magnitude of daily movements vs. $ increased in the spring of 2006,
.004
Changes in CNY per USD over Time: 07/22/05-1/8/2007
2
Historical timeline
“I have listened to both sides of this debate. Here is what I think. I think those who call for a fixed exchange rate are right in the short run. And those who call for a floating exchange rate are right in the long run. How long is the short run, you ask? You must understand. China is 8000 years old. So when I say, short run, it could be 100 years.”
Timeline, continued: China’s macroeconomy • 2004-07: • 2005-06:
Rapid growth puts China into Excess Demand.
Despite large balance of payments surpluses, PBoC sterilization of reserve inflows prevents excessive money growth & inflation. Money becomes excessive. – Inflation becomes a serious concern. – Shanghai stock market experiences a bubble.
• 2007-08: Sterilization finally falters: • Mid-2008 – early 2009: • Mid-2009 – 2011:
Worst of the global recession hits.
– China loses 26% of exports – Growth slows; danger of overheating disappears.
5
Timeline, continued: Exchange rate • Jan. 1994: China ห้องสมุดไป่ตู้evalues its official rate,
– unifying its dual exchange rate system.
• 1997-98: East Asia crisis.
– Subsequent versions, by Baucus-Grassley and others substitute the phrase ―currency misalignment‖ in place of ―unfair manipulation‖ to ease standard of proof.7
China-US Currency Issues
Jeffrey Frankel
Harpel Professor
CHINA FUTURE LEADERS,
10 a.m., Bell Hall, January 17, 2011
Revised from CLD Program, June 8, 2010;