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In the 1990s, almost the whole world agreed that the Chinese RMB
was about to collapse.
I was a lonely and noisy contrarian in those years. In December 1998 when, as the head of China research, I was sacked by my employer, HSBC Securities, for giving an interview to the South China Morning Post (SCMP) on the basis of my published report which argued that the renminbi was undervalued rather than overvalued, and that the currency would strengthen significantly against the US dollar. I further opined that the Chinese Ministry of Finance's plan to issue a 2 billion dollar "Yankee bond" was a "lose-lose proposition" because China's foreign reserves were already too high (merely 130 billion USD at the time).
It was not my radical view that caused my sacking, though my view did irritate some inside HSBC and among the bank's clients. No, the real reason for my sacking was that HSBC, together with Goldman Sachs, was the underwriter of the Yankee bond.
Out of work for a few months, I was hired in 1999 as the head of China research by UBS, one of my former employers. I repeated my contrarian view in reports and newspaper op-eds with even greater conviction. And I almost lost my job again, though for a different reason. A powerful player at the investment bank's head office, during his visit to Hong Kong, came to my office for a chat. I was out of the office so he left me a handwritten note to say that I was "dead wrong" and that I ought to "heed the house view". I kept his note, but ignored his warning.
______________________
Don't write off the yuan,
by Joe Zhang, Nikkei Asia Review, 28 January 2016,
http://asia.nikkei.com/Viewpoints/Viewpoints/Don-t-write-off-the-yuan
In the late 1990s, the consensus inside and outside China was that the Chinese yuan would collapse. I do not know of a China expert who did not write articles to that effect. Economists at investment banks routinely rolled over their forecasts of a yuan depreciation on a monthly and quarterly basis.
I was a lonely and noisy contrarian in those years, first as head of China research at HSBC Securities and then in a comparable post at UBS, insisting in published articles and interviews that the currency was more likely to appreciate than to decline. Today, the world has reached a similar consensus about the likelihood of yuan depreciation. But I feel that the “China watching” industry may be making the same mistake.
The argument for a yuan depreciation is widely aired, so I will not repeat it. But there are several key factors that I think observers have chosen to neglect. First, fair exchange rates are not defined as a magic number; they make up a wide range. In my view, today's yuan is still within that fair range, whichever metric you look at -- for example, its purchasing power relative to other currencies.
Second, whatever the calculation, the ultimate proof of the fairness of an exchange rate is the country's external trade balance. On that score, the yuan is doing very well. China's trade surpluses in recent months have been near record highs. The truth is that China remains an impressive export machine despite some obvious erosion of its competitiveness, and despite the protectionism of its trading partners. Due to the collapse of commodity prices in recent years, China's import bills will continue to shrink much faster than the decline of its exports, yielding growing trade surpluses.
Indeed, China's trade surplus will likely grow in the next few years in either scenario; if the global economy turns around, which means higher commodity prices, China's exports will grow on the back of higher demand from the West for its products. If the global economy stays weak, China's import bills will stay low thanks to low commodity prices.
Third, despite increased anxiety in recent years among Chinese citizens as well as businessmen, China still boasts remarkable political stability, and the government still commands popular support. Importantly, economic freedom is now growing rather than declining. That means that capital flight will be limited. It may even have run its full course. However, note that the state sector is still in control of at least two-thirds of the economy.
Finally, throughout the late 1980s and the 1990s, there was an active black market for foreign currency exchange in China, and the dollar traded between 10-15 yuan on the black market, compared with 5-8 in the official market. Even when I was a manager at the central bank in 1989 I had to buy dollars from the black market to help finance my overseas education. That illustrates how tight the market was at the time.
In those years, and even much earlier, the People's Bank of China had to ration foreign exchange through quotas and foreign exchange certificates. Many draconian rules were enforced to maintain exchange rates. Not surprisingly, there was rampant corruption in the process, and large numbers of officials and businessmen were jailed for violations.
No real pressure
By comparison, today's situation is vastly different. The rationing system is long gone, as is the foreign exchange certificate. Each year, millions of Chinese citizens readily obtain foreign exchange from official channels to finance overseas travel, education, purchases, and even investments. Therefore, there is no black market for foreign exchange trading. I have to conclude that there is no real pressure on the yuan. China's foreign reserves of more than $3 trillion are in any case too high for any pressure to succeed.
China's share of global gross domestic product has grown from 3.5% in 1997 to more than 13.5%. The yuan is slowly but surely being accepted by China's trading partners as a medium of exchange. Even the International Monetary Fund is accepting it as a reserve currency. In the past decade, the yuan has appreciated significantly against almost every major currency in the world. Given the weakness of China's economy today, Beijing has incentives to unwind some of that.
Beijing's clumsy maneuver last August, when it depreciated the currency without warning and then reversed course, gave the game away. But the panic in the global market has caught Chinese officials by surprise. They now realized that China is not just another emerging market. It is an anchor of the global economy. That was the message from the global market. Even the devaluation of the Japanese yen by as much as a third in recent years did not cause the global market to react as violently as China's 2% to 3% depreciation.
Precisely because of that drama, Beijing is now working hard to reverse market expectations. To prevail will not be too hard. China's performance as a major stabilizing force in the 1998 Asian financial crisis and the 2008 subprime crisis has earned Beijing a high degree of credibility, and Beijing will not want to squander that economic good will.
After all, exchange rates are not crucial to China's export growth, which is influenced by many other more important factors, such as “red tape,” and taxes. If Beijing is desperate to stimulate the economy, it has many other levers to pull. It is not doing this yet, and does not seem desperate. A slower economic growth rate is now seen as an acceptable new normal by Beijing. After all, many academics have shown that a weaker currency does not boost exports as much as was commonly assumed. On the contrary, it erodes confidence, creates uncertainty, and causes import bills to swell.
All these considerations underline Beijing's recent efforts to stabilize the foreign exchange market. It is succeeding and will prevail soon. It is dangerous to make predictions, but I am still tempted. I think the yuan is likely to be stable, and may even appreciate against the dollar in the next few years.
Joe Zhang is chairman of China Smartpay Group and author of "Party Man, Company Man: Is China's State Capitalism Doomed?"
I was a lonely and noisy contrarian in those years. In December 1998 when, as the head of China research, I was sacked by my employer, HSBC Securities, for giving an interview to the South China Morning Post (SCMP) on the basis of my published report which argued that the renminbi was undervalued rather than overvalued, and that the currency would strengthen significantly against the US dollar. I further opined that the Chinese Ministry of Finance's plan to issue a 2 billion dollar "Yankee bond" was a "lose-lose proposition" because China's foreign reserves were already too high (merely 130 billion USD at the time).
It was not my radical view that caused my sacking, though my view did irritate some inside HSBC and among the bank's clients. No, the real reason for my sacking was that HSBC, together with Goldman Sachs, was the underwriter of the Yankee bond.
Out of work for a few months, I was hired in 1999 as the head of China research by UBS, one of my former employers. I repeated my contrarian view in reports and newspaper op-eds with even greater conviction. And I almost lost my job again, though for a different reason. A powerful player at the investment bank's head office, during his visit to Hong Kong, came to my office for a chat. I was out of the office so he left me a handwritten note to say that I was "dead wrong" and that I ought to "heed the house view". I kept his note, but ignored his warning.
______________________
Don't write off the yuan,
by Joe Zhang, Nikkei Asia Review, 28 January 2016,
http://asia.nikkei.com/Viewpoints/Viewpoints/Don-t-write-off-the-yuan
In the late 1990s, the consensus inside and outside China was that the Chinese yuan would collapse. I do not know of a China expert who did not write articles to that effect. Economists at investment banks routinely rolled over their forecasts of a yuan depreciation on a monthly and quarterly basis.
I was a lonely and noisy contrarian in those years, first as head of China research at HSBC Securities and then in a comparable post at UBS, insisting in published articles and interviews that the currency was more likely to appreciate than to decline. Today, the world has reached a similar consensus about the likelihood of yuan depreciation. But I feel that the “China watching” industry may be making the same mistake.
The argument for a yuan depreciation is widely aired, so I will not repeat it. But there are several key factors that I think observers have chosen to neglect. First, fair exchange rates are not defined as a magic number; they make up a wide range. In my view, today's yuan is still within that fair range, whichever metric you look at -- for example, its purchasing power relative to other currencies.
Second, whatever the calculation, the ultimate proof of the fairness of an exchange rate is the country's external trade balance. On that score, the yuan is doing very well. China's trade surpluses in recent months have been near record highs. The truth is that China remains an impressive export machine despite some obvious erosion of its competitiveness, and despite the protectionism of its trading partners. Due to the collapse of commodity prices in recent years, China's import bills will continue to shrink much faster than the decline of its exports, yielding growing trade surpluses.
Indeed, China's trade surplus will likely grow in the next few years in either scenario; if the global economy turns around, which means higher commodity prices, China's exports will grow on the back of higher demand from the West for its products. If the global economy stays weak, China's import bills will stay low thanks to low commodity prices.
Third, despite increased anxiety in recent years among Chinese citizens as well as businessmen, China still boasts remarkable political stability, and the government still commands popular support. Importantly, economic freedom is now growing rather than declining. That means that capital flight will be limited. It may even have run its full course. However, note that the state sector is still in control of at least two-thirds of the economy.
Finally, throughout the late 1980s and the 1990s, there was an active black market for foreign currency exchange in China, and the dollar traded between 10-15 yuan on the black market, compared with 5-8 in the official market. Even when I was a manager at the central bank in 1989 I had to buy dollars from the black market to help finance my overseas education. That illustrates how tight the market was at the time.
In those years, and even much earlier, the People's Bank of China had to ration foreign exchange through quotas and foreign exchange certificates. Many draconian rules were enforced to maintain exchange rates. Not surprisingly, there was rampant corruption in the process, and large numbers of officials and businessmen were jailed for violations.
No real pressure
By comparison, today's situation is vastly different. The rationing system is long gone, as is the foreign exchange certificate. Each year, millions of Chinese citizens readily obtain foreign exchange from official channels to finance overseas travel, education, purchases, and even investments. Therefore, there is no black market for foreign exchange trading. I have to conclude that there is no real pressure on the yuan. China's foreign reserves of more than $3 trillion are in any case too high for any pressure to succeed.
China's share of global gross domestic product has grown from 3.5% in 1997 to more than 13.5%. The yuan is slowly but surely being accepted by China's trading partners as a medium of exchange. Even the International Monetary Fund is accepting it as a reserve currency. In the past decade, the yuan has appreciated significantly against almost every major currency in the world. Given the weakness of China's economy today, Beijing has incentives to unwind some of that.
Beijing's clumsy maneuver last August, when it depreciated the currency without warning and then reversed course, gave the game away. But the panic in the global market has caught Chinese officials by surprise. They now realized that China is not just another emerging market. It is an anchor of the global economy. That was the message from the global market. Even the devaluation of the Japanese yen by as much as a third in recent years did not cause the global market to react as violently as China's 2% to 3% depreciation.
Precisely because of that drama, Beijing is now working hard to reverse market expectations. To prevail will not be too hard. China's performance as a major stabilizing force in the 1998 Asian financial crisis and the 2008 subprime crisis has earned Beijing a high degree of credibility, and Beijing will not want to squander that economic good will.
After all, exchange rates are not crucial to China's export growth, which is influenced by many other more important factors, such as “red tape,” and taxes. If Beijing is desperate to stimulate the economy, it has many other levers to pull. It is not doing this yet, and does not seem desperate. A slower economic growth rate is now seen as an acceptable new normal by Beijing. After all, many academics have shown that a weaker currency does not boost exports as much as was commonly assumed. On the contrary, it erodes confidence, creates uncertainty, and causes import bills to swell.
All these considerations underline Beijing's recent efforts to stabilize the foreign exchange market. It is succeeding and will prevail soon. It is dangerous to make predictions, but I am still tempted. I think the yuan is likely to be stable, and may even appreciate against the dollar in the next few years.
Joe Zhang is chairman of China Smartpay Group and author of "Party Man, Company Man: Is China's State Capitalism Doomed?"
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