economics
January 9, 2010
China must live with hot money – or revalue
Filed under: Uncategorized — ktetaichinh @ 3:54 am
Tags: appreciation, asset price bubble, china, currency speculation
Hot money is on Beijing’s hit list. Unexplained inflows of foreign currency roared back during 2009, to maybe $200bn.
While policymakers gripe – a senior official railed against speculative money earlier this week – this is the result of their decision to keep China’s currency cheap.
If Beijing won’t revalue the yuan, the best it can do is scramble to close some of the loopholes through which hot money flows.
Speculative capital – defined as foreign money not accounted for in official trade and investment data – generally chases the idea that the yuan will be revalued. Beijing doesn’t like it for two reasons. First, because it is helping fuel the asset price boom which saw stocks rise 78pc in 2009 and property prices increase 20pc.
Second, hot money is putting yet more pressure on the yuan to appreciate. To counteract that, the central bank has to print more money – and, to stop that turning into inflation, it then has to issue bonds to soak up the money.
That doesn’t just cost in terms of paying coupons; it means that the domestic banks, which get arm-twisted into buying the bonds, have their balance sheets clogged up with low-yielding assets.
A sharp revaluation of the yuan would stop speculative flows. A researcher at a state think-tank called for a 10pc one-off hike on Wednesday. Yet with exports still falling year on year, the government may feel it cannot take such drastic measures now.
That leaves Beijing fighting to plug holes in the system. Last year, some 44 illegal exchanges in the border city of Shenzhen shifted $3.5bn across the border, according to a government statement this week. Those exchanges have now been closed – and presumably there can be a crackdown on other similar ones.
Another popular trick is the creation of fictitious export receipts in order to bring in illegal foreign money. A domestic exporter might, for example, pretend to sell pencil sharpeners to a Hong Kong investor. That would be used as a cover for the investor to pass over dollars that could then be converted into yuan. Beijing’s constant efforts to root out the fiddling of company accounts might help to close this loophole a bit – but don’t expect miracles.
Ultimately, hot money is a choice. If China won’t revalue the yuan, foreign inflows will keep driving up asset prices. But if the bubble bursts, Beijing may discover that money finds a way out just as quickly as it found a way in. That would take pressure off the yuan but land China with all the social costs of a collapsed bubble.
January 9, 2010
China must live with hot money – or revalue
Filed under: Uncategorized — ktetaichinh @ 3:54 am
Tags: appreciation, asset price bubble, china, currency speculation
Hot money is on Beijing’s hit list. Unexplained inflows of foreign currency roared back during 2009, to maybe $200bn.
While policymakers gripe – a senior official railed against speculative money earlier this week – this is the result of their decision to keep China’s currency cheap.
If Beijing won’t revalue the yuan, the best it can do is scramble to close some of the loopholes through which hot money flows.
Speculative capital – defined as foreign money not accounted for in official trade and investment data – generally chases the idea that the yuan will be revalued. Beijing doesn’t like it for two reasons. First, because it is helping fuel the asset price boom which saw stocks rise 78pc in 2009 and property prices increase 20pc.
Second, hot money is putting yet more pressure on the yuan to appreciate. To counteract that, the central bank has to print more money – and, to stop that turning into inflation, it then has to issue bonds to soak up the money.
That doesn’t just cost in terms of paying coupons; it means that the domestic banks, which get arm-twisted into buying the bonds, have their balance sheets clogged up with low-yielding assets.
A sharp revaluation of the yuan would stop speculative flows. A researcher at a state think-tank called for a 10pc one-off hike on Wednesday. Yet with exports still falling year on year, the government may feel it cannot take such drastic measures now.
That leaves Beijing fighting to plug holes in the system. Last year, some 44 illegal exchanges in the border city of Shenzhen shifted $3.5bn across the border, according to a government statement this week. Those exchanges have now been closed – and presumably there can be a crackdown on other similar ones.
Another popular trick is the creation of fictitious export receipts in order to bring in illegal foreign money. A domestic exporter might, for example, pretend to sell pencil sharpeners to a Hong Kong investor. That would be used as a cover for the investor to pass over dollars that could then be converted into yuan. Beijing’s constant efforts to root out the fiddling of company accounts might help to close this loophole a bit – but don’t expect miracles.
Ultimately, hot money is a choice. If China won’t revalue the yuan, foreign inflows will keep driving up asset prices. But if the bubble bursts, Beijing may discover that money finds a way out just as quickly as it found a way in. That would take pressure off the yuan but land China with all the social costs of a collapsed bubble.