China Should Reduce Reserves By 2/3 to 3/4 of Current Levels

from Xinhua News:


BEIJING, April 23 (Xinhua) -- China should reduce its excessive foreign exchange reserves and further diversify its holdings, Tang Shuangning, chairman of China Everbright Group, said on Saturday.
The amount of foreign exchange reserves should be restricted to between 800 billion to 1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that the current reserve amount is too high.
China's foreign exchange reserves increased by 197.4 billion U.S. dollars in the first three months of this year to 3.04 trillion U.S. dollars by the end of March.
Tang's remarks echoed the stance of Zhou Xiaochuan, governor of China's central bank, who said on Monday that China's foreign exchange reserves "exceed our reasonable requirement" and that the government should upgrade and diversify its foreign exchange management using the excessive reserves.
Meanwhile, Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.
Tang also said that China should further diversify its foreign exchange holdings. He suggested five channels for using the reserves, including replenishing state-owned capital in key sectors and enterprises, purchasing strategic resources, expanding overseas investment, issuing foreign bonds and improving national welfare in areas like education and health.
However, these strategies can only treat the symptoms but not the root cause, he said, noting that the key is to reform the mechanism of how the reserves are generated and managed.

China Says It Will End Currency Peg

from the Bank of China:
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

China Slowly Starting to Move Away from Dollar

- Huang Xinyuan, who sells mining equipment and pesticides to customers across China’s border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan.

Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.

“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”

China expanded yuan settlement agreements last week from border zones to its largest financial centers, including Shanghai, Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations seeking to reduce the dollar’s role as the linchpin of world finance and trade.

The central bank first brought up the concept of a supranational currency to replace the greenback in reserves in March. It will sponsor use of the yuan in trade by arranging export tax rebates. Russia and India said the global financial crisis had highlighted the dollar’s flaws and called for a debate before the Group of Eight leaders meet in L’Aquila, Italy, starting today.

‘Raise Questions’

“It does give you an idea of what the future could look like,” said Ben Simpfendorfer, chief China economist in Hong Kong at Royal Bank of Scotland Group Plc, the fifth-biggest foreign-exchange trader. “The Chinese see an opportunity at this point to raise questions about the dollar and its status as a reserve currency.”

China, the biggest overseas holder of U.S. Treasuries, trimmed its holdings of government notes and bonds by $4.4 billion to $763.5 billion in April. Premier Wen Jiabao said in March that he was “worried” the dollar would weaken as U.S. President Barack Obama sells record amounts of debt to fund his $787 billion economic stimulus plan.

“The objective is to develop a substitute for the dollar as the world’s reserve currency,” said Tim Condon, Singapore- based head of Asia research at ING Groep NV, part of the largest Dutch financial-services group. “That will reduce the ability of the U.S. government to finance deficits with impunity.”

‘Justifiable Confidence’

Treasury Secretary Timothy Geithner said during a visit to Beijing on June 2 that Chinese officials expressed “justifiable confidence” in the strength of the American economy. China expects the greenback to maintain its role for “many years to come,” Deputy Foreign Minister He Yafei told reporters in Rome on July 5.

In Pingxiang’s Puzhai border zone, traders prefer the yuan. A parking lot that doubles as a wholesale market is jammed with container trucks with license plates from as far as Shandong, about 1,930 kilometers to the north. Garlic-laden motorcycles snake through a checkpoint to the border control.

Traders from Vietnam bring harvests of lychees and dragon fruit, departing with toys, household appliances and medical supplies to sell back home.

Luo Huiguang, 27, who sells as much as 100 tons daily of onions and garlic, collects payment in yuan wired from Vietnam.

“I prefer it to the Vietnam dong or U.S. dollar,” said Luo as he shuttled between warehouses and trucks. “There’s less hassle and we don’t need to convert the currency.”

Erase Profits

Exporters typically set prices to earn 5 percent profit on sales, so 1 percent currency transaction costs and swings in the value of the dollar can wipe out returns, Simpfendorfer said. Many businesses lack the scale to hedge foreign-exchange risks, said Huang at Jinbei, which did $50 million in trade last year.

Limited use of the yuan has been allowed since 2003 in border trade with Vietnam and Laos to the south and Mongolia and Russia in the north, according to a book published by the Beijing-based State Administration of Foreign Exchange.

The central bank extended settlement last week by offering companies in Shanghai and four southern cities tax breaks to start conducting trade in the currency with Hong Kong, Macau and the 10 members of the Association of Southeast Asian Nations, which includes Indonesia, Thailand and Malaysia.

In five years, yuan contracts may account for 50 percent of China’s trade with Hong Kong, which totaled $204 billion in 2008, according to Lian Ping, chief economist in Shanghai at Bank of Communications Co., the nation’s fifth-largest lender. They may make up 30 percent of shipments between the nation and Asean countries that last year reached $231 billion, he said.

Yuan Appreciation

“The yuan will resume appreciation next year,” Lian said. “More people will use the yuan in international trade.”

China’s central bank has limited the yuan’s gains in the past year to 0.3 percent to help support exports during the global recession. The dollar may depreciate by 5 percent annually against the currency over the next two years, ING’s Condon said. Simpfendorfer forecast the yuan will rise 5 percent to 6.5 per dollar from 6.833 by the middle of next year. The median forecast of 27 analysts in a Bloomberg survey was 6.7.

For all the concern that the dollar’s role is waning, China has continued to lead buying of U.S. assets. The greenback accounted for 65 percent of central bank reserves on March 31, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington.

‘China’s Desire’

“This is not a six-month or one-year story,” said Kenneth Akintewe, a Singapore-based fund manager who helps oversee $138 billion of assets at Aberdeen Asset Management Plc. “China’s desire to control the currency, particularly in the current environment, will supersede its ambitions for the yuan.”

China’s currency isn’t fully convertible for investment purposes. HSBC Holdings Plc, based in London, and Bank of East Asia Ltd. in Hong Kong won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong.

Asian companies may be willing to accept yuan to win market share in the world’s fastest-growing economy, said Pushpanathan Sundram, a deputy secretary-general of Asean. The U.S. economy will contract 3 percent in 2009, while China expands 7.2 percent and the Asia-Pacific region grows 5 percent, according to World Bank forecasts.

“The use of the yuan may eventually boil down to simple economics,” Pushpanathan said. “Given China’s growing share in international trade, traders may find it makes economic sense to make settlements in the yuan.”

Russia, Brazil

Since December, the People’s Bank of China has provided 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency swaps, encouraging its use in trade and finance. Russia and China agreed to expand use of the ruble and yuan in bilateral trade on June 17. Brazil and China began studying a similar proposal in May.

Converting payments to a third currency “seems to be unreasonable” when Chinese partners are both supplying equipment and buying processed raw materials, said Pavel Maslovsky, deputy chairman of Peter Hambro Mining Plc, Russia’s second-largest gold producer. It develops iron ore projects in the Amur region bordering China.

“The Chinese economy is in such a shape now that their project to export yuan may turn highly efficient,” said Eduard Taran, chairman of OOO RATM Holding, a Siberian cement producer also considering buying Chinese machinery in yuan and exporting output in the currency.

About 160 kilometers north of Pingxiang, yellow cranes jut skywards from a dusty 3 square-kilometer construction site in the provincial capital of Nanning. The plot will house trade missions and businesses from the Asean countries.

“Many countries view China as the savior in this global economic crisis,” said Pan Hejun, vice-mayor. “It’s natural that other countries will be willing to use the yuan to settle trade and hold it among their reserves.”

--Chua Kong Ho, Judy Chen. With assistance from Shanthy Nambiar in Bangkok, Lilian Karunungan in Singapore and Brad Cook and Ilya Khrennikov in Moscow. Editors: Sandy Hendry, Neil Western

Dollar Debt Still Beats BRIC Debt

from Bloomberg:
For all the criticism of the U.S. currency by leaders of the so-called BRIC nations, dollar bonds sold by the largest emerging-market countries are outperforming debt traded in reais, rubles and yuan.

Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a “more diversified” monetary system yesterday to reduce dependency on the world’s reserve currency. The four leaders met in the Urals city of Yekaterinburg, where they planned to discuss buying each other’s bonds and foreign exchange, said Arkady Dvorkovich, Medvedev’s top economic adviser.

“It’s not up to politicians to determine which currency will be the world reserve currency,” said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. “In the end the market decides it.”

Dollar bonds sold by China earned 11.4 percent in the past year, more than double the 4.6 percent for debt in yuan, JPMorgan Chase & Co. indexes show. Brazil’s U.S. currency bonds returned 3.6 percent as real-based notes lost 4.9 percent, and Russia’s dollar bonds outperformed with a 1.9 percent loss compared with a 7 percent drop in ruble debt. India doesn’t have dollar-denominated debt.

‘Illiquid Market’

Bonds sold in dollars have beaten domestic debt in part because Russia and China manage the ruble and yuan. Those denominated in the U.S. currency can trade more freely, giving fund managers confidence they can sell the securities and get their money when they need it.

The result is limited foreign investment in local-currency bond markets, said Ward Brown, who manages $5 billion of emerging-market debt at Massachusetts Financial Services in Boston. Only Brazil’s real is free-floating. India imposes capital controls to protect the rupee.

China and India are “highly restrictive on the local debt side” and Russia has “quite an illiquid market” for foreign investors, said Cristina Panait, an emerging-market strategist at Los Angeles-based Payden & Rygel, which manages more than $50 billion. “Currency performance is a big portion of returns.”

The real rallied 11.2 percent last month, the ruble gained 6.9 percent and the rupee rose 6.4 percent against the dollar. The yuan appreciated 21 percent between July 2005, when the government allowed it to trade more freely, and July 2008. China has prevented the currency from strengthening since then as the economy slowed.

The Chinese government today sold 28.27 billion yuan ($4.13 billion) of yuan-denominated bonds maturing in 2019.

IMF Bonds

Political and financial leaders in the BRIC countries say they want to take a larger role in the world financial system as their foreign reserves swell and the U.S. economy endures its worst crisis since the 1930s. The Dollar Index, which measures the U.S. currency against those of six trading partners, has dropped 9.4 percent from a three-year high in March.

The BRICs account for 15 percent of the world economy and hold $2.8 trillion in foreign-currency reserves, or about 42 percent of the total, according to data compiled by Bloomberg.

Last week, Russia and Brazil announced plans to buy $20 billion of bonds from the International Monetary Fund, after China said it was considering purchasing $50 billion of the securities. The purchases would both support the IMF, established to help nations rebuild from the ruins of World War II, and diversify some of their holdings.

Too Early

The BRIC leaders, among the biggest holders of U.S. assets, alternate between critiques of the dollar and support. Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan the same month proposed a new global currency to reduce reliance on the dollar.

Treasury Secretary Timothy Geithner said on June 2 Chinese leaders hadn’t expressed concern about the safety of U.S. debt during meetings in Beijing and said they “expect the dollar to be the principal reserve currency for a long period of time.”

Medvedev said earlier this month that the dollar wasn’t in a “spectacular position.” On June 13, Finance Minister Alexei Kudrin reassured investors of the country’s confidence in the greenback by saying it was “still early to speak of other reserve currencies.”

Treasury Holdings

In May, China and Brazil began studying a proposal to move away from the dollar to settle trade and use yuan and reais instead. Brazilian Finance Minister Guido Mantega said on June 10 the government’s decision to switch reserves into IMF bonds wasn’t aimed at weakening the dollar.

China and Russia agreed to use each other’s currencies more in bilateral trade to lessen dependence on the dollar, Medvedev told reporters in the Kremlin today after talks with Hu.

The leaders of the BRIC nations didn’t discuss the possibility of buying each other’s bonds during the summit in Yekaterinburg yesterday, Brazil’s Lula told reporters today in Astana, the capital of Kazakhstan.

China trimmed its holdings of U.S. Treasuries by $4.4 billion to $763.5 billion in April, Russia’s slipped by $1.4 billion to $137 billion and Brazil’s by $600 million to $126 billion. In May, the BRIC nations spent more than $60 billion buying foreign currencies, mainly dollars, to stop their currencies from gaining, according to central bank data and strategist estimates.

While the ballooning budget deficit is keeping the U.S. reliant on foreign financing, the world’s biggest economy is almost double the size of Brazil, Russia, India and China combined, based on 2008 figures compiled by Bloomberg. America’s market sustains the world’s biggest developing nations, with China increasing sales to the U.S. to $337.7 billion last year from $321.4 billion in 2007.

‘Political Gesture’

The dollar accounted for 64 percent of central bank reserves worldwide at year-end, up from 62.8 percent in June 2008, according to the IMF. The currency has underpinned exchange rates since the 1971 collapse of the Bretton Woods system, which linked their value to gold.

Statements about changing the global foreign exchange system are “just a political gesture,” said Pablo Cisilino, who manages $10 billion in emerging-market debt at Stone Harbor Investment Partners in New York. “At the end of the day, there is only one reserve currency on the planet.”

More Dollar Dumping -- Go Yuan!

from the Daily Telegraph (UK):

Top Chinese banker Guo Shuqing calls for wider use of yuan

The head of China's second-largest bank has said the United States government should start issuing bonds in yuan, rather than dollars, in the latest indication of the increasing importance of the Chinese currency.

Guo Shuqing, the chairman of state-controlled China Construction Bank (CCB), also said he is exploring the possibility of issuing loans to trading companies in yuan, allowing Chinese and foreign companies to settle their bills in yuan rather than in dollars.

Mr Guo said the issuing of yuan bonds in Hong Kong and Shanghai would help to develop the debt markets in China and promote the yuan as a major international currency.

It was the first time the head of a major Chinese bank has called for the wider use of the yuan, although a chorus of senior government officials have already voiced their concerns about the stability of the dollar and have said the yuan should be used more widely.

The US Dollar Vs. The Chinese Yuan

from Blog for Trading Success:

Whenever I have suggested that China may stop supporting the US$, skeptics have effectively said:

“Yeah! And pigs can fly!”

It would be instructive to review their thinking:

1. China has reserves of US$2 trillion
2. Its reserves are so massive that the only country that can accept buying of that size is the US.
3. Thus, China must continue to buy US securities and continue to support the US$ even if it believes the US is embarking upon a path of devaluation through inflation.

The apologists have a point but need to start looking over their shoulders. The Chinese are not one to sit idly by while the US debases its currency.

What can it do?

Reading the news, it’s clear that there is a minor and major strategy at play:

1. Minor: diversify into gold and perhaps oil. Chinese gold reserves since 2004 have increased by over 70% at a reported expenditure of over US$30 billion.
2. Major: raise the credibility of its own currency. It is doing this in two stages. The first stage is to undermine world confidence in the US$ by proposing an alternative to reserve currency. The second stage would be to substitute the Yuan for the US$.

Substituting the Yuan for the US$ will take time; but the Chinese are nothing if not patient. China has been laying the foundation. Witness:

1. Since January 2009, China has signed currency swap agreements worth US$95 million with Argentina, Brazil, South Korea, Indonesia, Malaysia, Belarus and Hong Kong.
2. The cross-straits agreement between China and Taiwan
3. The yuan carry trade

These are all steps in China’s efforts to dethrone the US$. Sure it won’t happen tomorrow. But if Obama continues on his merry way, expect it to happen.

Brazil, China Move to Dump the Dollar

from Financial Times:

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president.

The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month...

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

Renminbi in Ruins?

It may seem surprising that in recent weeks, the value of the Chinese Renminbi has been sagging. That chart doesn't lie!