Saturday, April 30, 2005

Testing the Water: China Plays Currency Games

The the longest time Americans have demanded the Chinese revalue their currency. No such demands are made with Japan who can't connect their perpetual depression with their perpetual currency game of constantly devaluing the yen by purchasing excess American dollars which we happily churn out and ship off to Japan. Since the Japanese hold much more of our debt than the Chinese, one would suppose we would be much angrier about their currency manipulations.

After all, it is Japanese cars that are killing our native car industry!

But, as usual, geopolitical games of Go trump mere domestic politics and we allow this to continue. On the other hand, our identical situation with China somehow ticks off everyone in our government!

So several interesting things happened this week that roiled the international currency markets, all of which came out of China:

China Bank Chief Hits at Communists

Two senior Chinese bank executives have made a provocative public call for the role of the ruling Communist party in financial institutions to be curbed

The chairman of China Construction Bank and the biggest shareholder of the country's largest property lender describe in an interview in financial magazine Caijing how the CCB's board has operated in the shadow of a party-controlled committee inside the bank. The comments were made by Xie Ping, who heads Central Huijin Investment, a majority shareholder in two of the big four state banks now preparing for overseas listings

Heads will roll. I can't predict which heads yet. Byzantine games are being played. Either Mr.Xie Ping is going to regret his remarks or he is being so bold because the Central Committee itself is divided on this issue. Right now, the Chinese can't go to a bank and get a "pay interest, no principal" loan. Nor can they get a credit card with a similar, minimum balance. Instead, the banks in China are being run like banks were run when I was younger: some frowning guy sits there and grills you for several hours before grudgingly giving you a loan after interviewing your entire circle of associates. I have sat through such grillings.

There are many who see Americans and think, if only we could live like that! Certainly, if Japan and China were to emulate us, the "crisis of too much savings" will collapse instantly.

Then yesterday a mysterious thing happened:
the yuan shot up for a few minutes in international currency trading.
Until this afternoon, China had ignored the demands. But as traders drifted back to their desks from lunch in Asian financial capitals on Friday, the yuan suddenly broke out of its prescribed trading range. No one knows for sure if the move was deliberate or a result of a technical glitch.

But regardless of whether it was a Chinese test of their ability to manage a rising yuan or simply a case of the Chinese central bank briefly failing to buy enough dollars to keep supporting the American currency, traders noticed it and the prices for many other currencies began to shift in response.

The yuan climbed until it took 8.270 of them to buy a dollar instead of the usual 8.276. That difference, of only six thousandths of a yuan, might not seem like much of a change.

But it came on the eve of a weeklong holiday in China and at a time of intense speculation that a Chinese revaluation of the currency, which has been fixed by Beijing against the dollar for years, might be imminent. The brief appreciation, a hint of further rises if the yuan were to float, was enough to roil currency markets around the world.

Here is the official Chinese news media:

China does not plan to revalue its currency, the yuan, during next week's Labor Day holiday, a central bank spokesman said Friday, quashing rumors that such a change was imminent.

"As far as we know, there's no adjustment expected in the yuan exchange rate," Bai Li, spokesman for the People's Bank of China, told Dow Jones Newswires.

Sounding like a Daoist philosopher, the official explained:

Bai declined to comment on the movement, saying: "It's up to the market to explain any market activities."

So today, the market struggles to figure out what happened. They wonder if some lowly clerk made an error in the published numbers or if the moon went into eclipse or if their rulers, Hu and Wen forgot to check their bank balances...all speculation by speculators.

One thing, this may have been a test of the system to see exactly how delicate it is and to see what the response would be. I am betting the ruling party is pleased to see all this repressed energy. When to use it is all up to them. You can bet, they are discussing this energetically but in their byzantine way...secretly.

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