Transcript Chinese Monetary Policy – exchange rate

Chinese Monetary Policy
– exchange rate
Content
Important events in exchange rate management
The art of allocating wealth
Credit slaverize
Fact: rich becomes richer
two Key Milestones
1994 Jan. 1st
integrate exchange rate market, consolidate and fix the exchange
rate to 1: 8.7 USD
2005 July 21st
Introduce “a basket of currencies” as for CNY exchange rate for
references, appreciated 2% to 8.11 on that day.
1994 Policy
What the government did
price depending on “demand & supply” from government
assigned bank,  but actually it is a pegged system 1:8.7
USD: CNY, with a floating allowance of 0.3% a day
USD is the only reference currency.
Consolidated the two market with a membership scheme,
All trade and settlement are done by inter-banking quote
system.
Paying a premium on the supply of foreign currency in
private sector.
A lot government intervention.
2005 policy
What the government did
RMB appreciated 2% to 1: 8.11 USD on that very day
Added “a basket of currencies” as Reference currencies,
they are: USD, HKD, JPY, EUR, GBP, MYR
Golden bull for Chinese stock market until 2007
Release the inflation pressure from huge international
reserve
Chinese Exchange rate policy concerns
Americans insists that China is manipulating exchange rate
to achieve price advantage to compete with American firms
in manufacturing industry
The Chinese policy makers view exchange rate policy as a
means to achieve certain economical goals
To avoid failure like Thailand in 1997,
To attract foreign investment fund
Monetary Policy
the art of allocating wealth
分配財富的藝術
We all know about the three basic feature of money,
medium of exchange, unit of account, and store of value.
But in real world, it is more than that.
There are several hidden identity of money
We all learned about the time value of money, there are
two key elements: Time and Price, or interest rate.
Different price of money represented different future
expectation of certain money
 This indicates that the money today in different
person’s possession does not necessarily worth the same
to each other.
Monetary Policy
the art of allocating wealth
分配財富的藝術
We all learned about the time value of money, there are
two key elements: Time and Price, or interest rate.
Different price of money represented different future
expectation of certain money
 This indicates that the money today in different
person’s possession does not necessarily worth the same
to each other.
Monetary Policy
the art of allocating wealth
分配財富的藝術
Government can make benchmark prices for money
through monetary policy (by setting different interest rate,
exchange rate)
 Government can control the future wealth of a society.
However, this is not the most powerful tool.
The most powerful tool is controlling the money supply. M1,
M2, M2++ whatever
strategy:
Low inflation to encourage people to work hard
High inflation to lick up the wealth the people created.
Monetary Policy
two-person economy
But government can not just do that because there will be
revolution fighting for this extreme unfairness.
So they change the name, by using credit.
Lets consider a two person economy
A plants for food to survive and provide all raw material,
and B is in charge of building infrastructure and other
production for both of them.
Monetary Policy
two-person economy
Think about A getting a mortgage for a house in
economically good time from B.
Pay only 20% of the total price, and borrow the rest under a
“Monetary loose” phase. Borrowing to stimulate
economy.
In economics terms, it is bringing the money from the future
to the present. It is increasing Money Supply, but the reality
is their wealth does not worth the same, or, their wealth is
“leveraged”
At the same time, people will pay for the price of borrowing,
say 5% of principal a year.
Monetary Policy
two-person economy
Two years later, both A and B find that the price are inflated,
as MS grows artificially by them. So B proposes to limit the
credit to fight inflation, by doing so, interest rate has to go
up, because supply of fund goes down, price of fund goes
up.
But A borrowed money before, so his price of fund went up
as well. There is no influence on B because he does not
need to borrow.
 Rich people are richer and richer.
Monetary Policy
Credit Slaverize:信貸奴化
Summary of two person model for credit slaverizing: three steps
1. Grow the fleece:
Loosen credit limit during expansionary phase
 Bring future money to present artificially increase money supply without
creating anxiety
2. Hunting the sheep:
Tighten credit limit during contractionary phase
 But it just stops bringing money from future to the present, it does not suck
up the money brought before
3. Cutting the fleece:
Force the poor into bankrupt and take over valuable assets
increase debt burden of them by change the interest rate because they have to
survive by relying on debt.
Benefit from lending money, as the first owner of the newly created money
Monetary Policy
the rich gets richer
In China, the rich people are becoming richer and richer.
According to Huren.net, in 2009, there are 825,000 people
who has more than ￥10,000,000 worth of asset in China
including 51,000 people with assets more than
￥100,000,000.
In 2010, there are respectively 875,000 and 55,000
Monetary Policy
the rich gets richer
Combined wealth of top 10 richest year by year
Year
Total
Growth
2005
94.7B
2006
154.9B
63%
2007
543.0B
250%
2008
272.5B
- 49%
2009
308.0B
13%
2010
405.0B
31%
Source hurun.net
Monetary Policy
the rich gets richer
GDP per Capita in USD vs. Rich people wealth growth
Year
Total
2005
4102.495
2006
4748.661
2007
Growth
Year
Total
2005
94.7B
15.75 %
2006
154.9B
63%
5553.39
16.95 %
2007
543.0B
250%
2008
6187.707
11.42 %
2008
272.5B
- 49%
2009
6778.091
9.54 %
2009
308.0B
13%
2010
7517.717
10.91 %
2010
405.0B
31%
Source: IMF. 2010
Growth
World Economic Outlook
Summary
There are two important Exchange rate policy adjustments
1994 and 2005
Mundel’s inconsistent trinity indicates that Chinese
government is trying to allow free of capital flow in China
Monetary policy is a useful tool to allocate the wealth of a
society by using money as the liability of the whole society.
Or credit slaverize
The rich gets richer and richer as a result.