The Yuan is a restricted currency. This can mean a number of different things (depending on how a country wishes to restrict it's currency). In the case of China it means that its' currency cannot be held outside of China. In London it's perfectly reasonable for an individual company to have multiple bank accounts with various currency. This is not possible with the Yuan.
Companies generally follow the law on currencies. So a London bank won't take yuan because the Chinese government says it can't. Your black market traders will take it, but they might...screw you over since you can hardly call the police on them.
The amounts handled by black market are harmless, that is not going to be enforced (unless it is necessary to make example of someone).
What the regulation does, is to protect against attack on the currency on the open market, like 1997 SE Asia one. Obviously Chinese are currently holding an opinion, that this protection is currently worth more than uncontrolled investment.
> Companies generally follow the law on currencies. So a London bank won't take yuan because the Chinese government says it can't.
I doubt it's that simple. Does that Chinese currency law have any force in the UK?
I'm by no means knowledgeable about this, but I'd imagine it's more like any bank that offers yuan accounts in the UK would necessarily need to be able to do business in China to make the accounts useful, subjecting it to Chinese law. Since the Chinese government forbids the latter, the former is loses its appeal. So a London bank could take yuan if it had no Chinese presence, but it wouldn't want to.
No it doesn't, but a bank that took RMB would basically be cut off from most sources that could consume RMB, like the Chinese government or Chinese companies. So they would be stuck keeping pieces of paper in a vault somewhere, hardly a nice situation to be in.
The value of a currency eventually leads back to the government that issued it.
When I spend a Dollar, the business that gets it puts it in a bank account. That Dollar can (theoretically) be taken to the issuing bank, in this case the Fed, by the business' bank, in order to get something of value.
To enforce the trading of Yuan, the Chinese we do not value Yuan held by in foreign accounts (or in the case of the "international" Yuan, it's value is restricted). So now those pieces of paper you have with Chinese lettering (or that account valued in Yuan) has nobody that gives it value... it's worthless.
From a practical standpoint it means that all of the <Legal> currency translations are done inside of china. You wire 100MM USD to a Chinese bank, they preform a book transfer and deposit the equivalent into your RMB account. The bank plays a weird middleman in the transaction. Same thing happens in Brazil with the BRL (and a number of other countries).
There are two Yuans, an offshore and an onshore one. You can't get access to the main one and there are arbitrage opportunities between them, due to the nature of the 'home' one being untradeable or unable to achieve price discovery due to a 50k a year limit on volume.
Because the Chinese government doesn't want it to be the case. They want the currency to be an instrument of government policy - to be able to make it weaker or stronger at will.
That's what the article Implies that China is working towards it by slowly removing controls from it currency. Nowhere did I read that it was already a reserve currency or becoming one next month.
>>Nowhere did I read that it was already a reserve currency or becoming one next month.
That's not equivalent to saying: Yuan may become a "world go-to currency" if China manages to remove many communist-style controls from it and demonstrates their intent to make it free-to-trade by allowing Yuan free-to-trade for a continuous period of 50 years at the least.
The article doesn't say this with such a detailed clarification and required qualifications to claims. Hence it seems like a propaganda coming from a communist dictatorship rather than a well researched article.
I find it hard to personally use the CNY/RMB for anything. Money is a special thing and all history is taken into account with risk. I can't realistically imagine my money safe at any point over a hypothetical 50 year timespan, especially considering the interventions in the HKD over the past year or with the RMB/CNY in general.
Imagine asking yourself the same thing about the US Dollar, Yen, even the Australian dollar, Pound over their entire timespan as a floated exchange rate. They've never been any illusions about it, it's WYSIWYG. You can't freely move CNY out of China to start with. Imagine having your savings, or backing your business on such a currency.
I guess eventually it's possible, say after more than 3-5 decades of proof that its a stable currency
Not sure what you mean about interventions in the HKD. The HKD is pegged against the USD and it's been that way since the poms were still in power and HK was a colony.
Specifically, since 1983, it has been pegged to the current rate.
HKD is basically the US dollar at this point, and it is fully convertible. Less risk than the RMB, which you should only hold to do biz in China or if you are resident there.
There were interventions in HIBOR last year that leaked into the HKD overnight rates. In effect lots of businesses ended up paying to help China stop currency outflows.
I was in this situation last year. After 8 years of working in China, I had much of my savings in RMB in a bank. I was pretty lazy about moving it out into investments, and since the RMB was appreciating, I didn't feel any pressure to jump through the hoops to do forex.
However, after the initial deprecation last year, I saw the writing on the wall, and got the money out. It wasn't easy, but it wasn't impossible either. Chinese citizens can exchange $50K USD a year, which doesn't seem to be going away, while foreigners can exchange what they earn in China...with proper tax documentation (it took a few weeks to complete my initial forex).
Investment opportunities in China really suck! You have the bubbly real estate market, the insider trader stock market, and foreigners are actually very restricted from doing either of both anyways (we can't buy stocks, acquiring property is tricky, not that I would want to do either). The only reason I kept my money in China was because of the appreciation, investments also weren't doing well at the time.
I can see the RMB being a serious currency..it isn't that messed up compared to say the Venezuelan Bolivar, or many currencies in SE Asia or even the Indian Rupee. Heck, the Japanese Yen is even more volatile, and I would have lost big time if I made bets on the pound or the Australian dollar. But the lack of convertibility, even if only partial, is a big show stopper. They really should make more effort to that, and they seem to have stalled for the last 10 years while walking backwards from the reforms of the early/mid 00's.
Truth, which is why holding the RMB to me was virtually pointless. I should have converted to USD and invested, but at the time investments were doing poorly while the RMB appreciated, so my procrastination saved me money. Can't count on that in the long term.
Money is used for three things - transactions, store of value, and unit of account. For store of value, the long term (or at least medium term) value is quite important.
Volatility isn't as important as low inflation and the ability of price discovery. I've heard the argument that the Yuan lacks volatility and hence it's stable - on the contrary, it risks sudden massive shocks and they spill out to other countries in other manifestations to compensate for the fixed exchange (or somewhat pegged) rate.
Price discovery is extremely important, even if it comes with volatility. It would be comforting to know that China could reinvest its trade surplus back into the US, which it's not doing well since it's not incentivised to do so, solely investing in Treasury's. This is why we're in a recession, because this cash is a drag on consumption, and its stuck in Treasuries.
Investing in treasuries IS investing in the US, just in a very safe low risk way. That is the value of the USD, at least, that you can always "save it" with the US gov (who is a dependable debtor of last resort). This is super good for the USD, and part of the reason interest rates are so low these days (all that extra Chinese money pushed down rates). With the Chinese stopping to use treasuries so much, one would guess that rates would pop up eventually.
The money isn't really the government's...it needs to be somewhat liquid and ready to use elsewhere. Treasuries are fairly liquid (you can't redeem them early, but you can always trade them) and are not very risky (though these days they often have effective negative interest rates).
I don't know the reality of buying btc in China, but there is no doubt that crypto-currencies are enormously powerful for moving money out of countries.
Earlier this year, my wife and I were in China helping her mom close an old bank account to move the money to Hong Kong (she's been an HK permanent resident for over a decade). It was almost $10k USD worth. The easiest option was to get it all in cash and take it back to Hong Kong. The largest RMB note is the ¥100, which is about $15 USD. Our pockets were stuffed with hundreds of notes. It felt very awkward. Even though it was legitimately our money, I was afraid at any moment I'd be pulled aside and charged with some kind of crime.
So yeah, I don't see RMB as very practical when the largest note available is equivalent to $15. Pretty much necessitates that every moderately large transaction will go through a bank, under the watchful eye of the Chinese government. I can't see many foreigners being interested in that kind of arrangement.
this is actually illegal in china. If you take more than a certain amount of currency out of the country including to HK you need to declare it and fill out a form. Many people get around this rule by walking across the HK border 10 or 15 time in one day carrying the exact max amount of currency. You can also hire parallel traders to do it for you as they are usually crossing back into HK empty handed because most of the time their are carrying goods from HK into the mainland and just returning to get more stuff
Fiat money should never be used as a savings vehicle. This is why the rich invest in property and ownership in real things. And no i'm not advocating gold.
China is building... and building and building. Houses mostly. It's basing its growth on housing and industry like the US economy.
The problem with that is that a LOT of Chinese people cannot buy a house. They simply don't have the liquid money or the same access to credit that American's do (for better or for worse).
So what they have now is a glut of supply in their housing market (built upon credit), with a lack of demand. And really there is no way for the Chinese government to create that demand. They can't go the QE route because your currency is restricted. You don't have diversified industry to kickstart. Steel is down. And you're already saddled with both domestic and foreign debt.
I'm no economist, but the future isn't that bright for China. Imo a Chinese collapse could be worst than an American one.
I wouldn't use the word "collapse", but a "crash" is definitely in the cards. The political system is too fragile to think that it can survive a crash, so they are trying to kick the can down the road as far as possible, which will just make the inevitable crash worse.
This is why they have huge outflows as on the graphic on the link. Yet they can't really make the world pay for it without it being self inflicting in one way.
Interestingly the forecast expansion of sovereign Chinese bonds from 4% of global total to 15% over the next 15 years, looks to come totally at the expense of Japanese sovereign bonds, not those of the U.S.
5.) nobody wants yuan outside China. people in China are desperate to exchange yuan for other things inside China.
All the conditions are there for hyperinflation to occur. Might happen early next year when europe and China both likely reject China's market economy status, and starts imposing tariff on Chinese imports heavily.
The argument is essentially that China's economy doesn't function as a proper market economy. That too much of its economy is directly governed by State controlled or owned corporations. That prices in its economy don't function enough based on market influences. An example of this would be their vast dumping of steel and some other industrial products, while their government continues to directly subsidize the dramatic over-production despite large losses in the steel industry.
>The argument is essentially that China's economy doesn't function as a proper market economy.
Which is true. I really hope this happens, it's time for China to start playing by the rules of a real market economy or lose access to the global market. We should not tolerate China subsidizing their industry, at the expense of other industrial countries.
I would argue: the only reason the US Dollar is the world's reserve currency is because it was created like that at the Bretton Woods conference shortly after the end of World War II. This was only accepted by the other allied nations because US Dollar was declared convertible to gold, at $35 per troy ounce. This, however, only remained the case for foreign central banks until 1971, when the promise was defaulted on. So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency. I doubt the Yuan -- or any other currency at all -- can replicate this, and I think that would be necessary.
I see no reason any central bank would want to swap out their Treasury bonds with Chinese government bonds (Treasury bonds are already too illiquid in times of crises, which is when we really need it), or any reason either consumers or merchants would want to start using the Yuan, other than to pay for imports from China.
Another note, Marshall Plan funds were given in USD. So it was in the European nation's favor to have a strong dollar. Strong dollar == more resources == more (better) reconstruction
It's also that the US doesn't play games with it's currency, there was alot learned from the 1850s experiments with 'free banking'. Since the collapse of Bretton Woods they've let the USD freely float without intervening or controlling it in any way. There's hardly much in the club as such: the GBP, JPY, CHF (broke all trust early last year, simply because they didn't do it on a weekend), USD, EUR and CAD. Fun fact with CHF, they've had 2.2% inflation on average since 1880, unrivalled, it's crazy they threw that stability away.
It's not as simple as just being in existence. There's alot of 'trust' to it too, Countries could easily diversify against the USD on their reserve baskets. The CNY isn't a significant proportion of any basket because of the lack of trust & free liquidity with it.
QE is debatable, in a sense it's 'printed' loans that need to be returned, there's no direct influence on the exchange rate. If the US ends up having inflation as a result, it'll be damaging and countries will need to find a way to deal with it by switching their reserve currencies away somewhat. Russia is doing this with gold, but who knows that could be political.
All in all, full employment matters more than currency perception overseas, at least if its done using free market forces, such as the purchase of bonds in the secondary market for QE.
>It's also that the US doesn't play games with it's currency,
Let's call a spade a spade. Sure, the US wasn't directly affecting rates. But a the time the financial world was burning, and people were flocking to (and holding) the Dollar for shelter. QE 1 2 and 3 were 600B, 600B and a monthly 85B. That much money put into the market keeps rates down simply because of supply influx.
Yes that's not good, but there's been no inflation as a result and the bonds the fed buys are freely tradable on the open market. Further the fed only trades on the secondary market so they wont directly bid in a Treasury auction. This isn't too bad picturing it. I assume if there is inflation there will be a problem so long as its not overdone like in the late 1970s.
There's more vexing things that would affect this perception such as the credit rating, especially with so much debt. Yet History says the managers in government, and the Fed are good at their jobs. So even despite the QE perception on money printing the issues with this haven't been much of an issue, or it would have shown up with a weaker dollar/diversification away from USD on central bank's balance sheets
> Yes that's not good, but there's been no inflation as a result and the bonds the fed buys are freely tradable on the open market.
There is certainly an enormous inflation of the money supply but you don't see and feel it because it is sitting idly in bank accounts or is invested in bonds, the stock market or real estate. (here we actually see inflation)
Once the holders of this money decide to move it out of these asset classes you are going to see inflation, because all of this money created by the FED does actually exist now.
> There is certainly an enormous inflation of the money supply
Of M0 or 'narrow' money, yes. But the broader money supply was shrinking as loans defaulted. Arguably QE was an attempt to equalise the total (broad) money supply, and price inflation can be expected if QE money is not withdrawn as new loans are made, or rather, as the total amount of debt increases, creating broad money through fractional reserve banking.
Reverse the creation process... creation consists of the central bank creating new money, and the government creating a new bond. Central bank buys the bond and the gov gets the money and can spend it on welfare or whatever.
To reverse the gov must buy the bond back with money from general taxation, on doing so the bond is redeemed and destroyed, and the central bank erases the money it received back in tandem with the bond.
Basically it's all smoke and mirrors, the various obligations (to redeem the bond, to do so with real money, etc. are all legal bindings and mechanisms that can be signed away with sufficient political support, thus reducing the whole process to good old fashioned money printing).
> To reverse the gov must buy the bond back with money from general taxation, on doing so the bond is redeemed and destroyed, and the central bank erases the money it received back in tandem with the bond.
Which is never going to happen. (at least in this political system) Currently Western governments can barely keep things running by increasing their debt at an almost exponential rate.
I agree. In fact if they inflate the money supply they devalue the currency that the debts are denominated in, so there's an incentive to inflate and there's no money to spare to reverse QE anyway, so the bonds remain in existence forever, and all of those legal bindings I mentioned become somewhat academic. Well, technically bonds have a fixed term, but in reality they just issue new bonds to replace the old ones as they reach maturity, so again we're back to smoke and mirrors.
>To reverse the gov must buy the bond back with money from general taxation, on doing so the bond is redeemed and destroyed, and the central bank erases the money it received back in tandem with the bond.
But this is already a normal part of the process. The government rolls over its debt as bonds mature, so the Fed can just take the money when the bond matures and not buy new bonds. That would force the government to borrow existing money from individuals and other countries instead of creating new money through the Fed, effectively taking that cash out of circulation at the cost of an increase in interest rates.
Also, the Fed bought corporate bonds under QE, so this isn't just a question of the government printing money to cover budget shortfalls.
You know it's funny how Socialists complain about evil businesses and IT professionals with their high income/profit being the cause for the insane real estate prices in San Francisco and other places when it is really their beloved government (I don't buy for a second that central banks are really independent) causing this by handing out free money to those who held stocks by artificially inflating the stock markets.
Of course these people are going to diversify because they can see the writing on the wall. So what are they going to invest in? Tangible assets like real estate. Here in the EU real estate has basically doubled in price during the last 4 years and people complain that they can't afford the rent anymore, yet the governments have been successful in convincing the majority that it's actually these evil Capitalists who are the cause for this.
If you don't like my viewpoint you can engage in a conversation, I'm not someone that ignores people with other opinions.
But I am going to make my case that governments should stop manipulating the markets whenever I want because it hurts the majority. (not me though, I've actually profited greatly from this. I'd still prefer it to be fair for everyone because I do not fear competition - competition actually gives me great pleasure whether I win or lose)
Tbh that's the effect of a low interest rate, not inflation. The inflation component would be the portion on your rent and even by that measure other items have decompensated more so than the rises in rent. Don't forget Oil was hovering around $150 just under a decade ago, and now its less than a 1/3rd of that.
>QE is debatable, in a sense it's 'printed' loans that need to be returned, there's no direct influence on the exchange rate.
People have this idea that with QE officially over the Fed's balance sheet will shrink over time, but it's not true. Bonds that were purchased under QE are replaced with new bonds as they mature, so it's effectively printed money.
This is just the kind of fiddling you don't want to see when you're holding currency.
That's their process of rolling over. They've specifically will at one point stop using the phrase in their monthly meetings, which means the bonds will be left to mature - thereby destroying the money they created & shrinking the balance sheet - the bonds get taken off, as does the reserve balance created to buy them.
It's nothing new in fact its near bog standard. This process is done with the lower maturity instruments when interest rates are higher by matching it up to the federal funds rate by purchasing or selling them & rolling them over in the exact same fashion (with this 'printed'/reserve money as well). It's just this is done using longer term assets instead.
>That's their process of rolling over. They've specifically will at one point stop using the phrase in their monthly meetings, which means the bonds will be left to mature...
That's the theory. I doubt it will ever actually happen, though, since whoever makes that decision will be blamed for any poor economic performance that follows.
This is why the Fed is apolitical. Their concern isn't with economic performance it's simply with full employment and inflation most and foremost. Even if it is at the cost of poor economic performance - infact that is the goal, thereby reducing inflationary pressure.
The Fed isn't anywhere near as apolitical as it pretends. Fed chairmen are appointed by the president, after all, and approved by the Senate, just like any other high level political appointee.
> It's also that the US doesn't play games with it's currency
I would never consider buying Yuan over Dollars but I simply cannot agree with this statement. What the FED has been doing since 2008 and the ECB with the Euro is a massive experiment in gaming the markets which could possibly lead to catastrophic event. At least in the case of the EU I have no doubt that this will happen.
Today when you buy commodities or currencies your success or failure is not determined anymore by what the market believes is valuable or not, but instead by what governments and bureaucrats have decided should be valuable or what should go down in value. I am fundamentally opposed to this because it creates a lot of bad behaviour, corruption and governments ending up owning previously privately held property and companies.
It is not inconceivable that we could see various Western governments ending up owning most of the property in their countries in the next decades. That'd certainly be a creative way to implement Communism, I'll give them that.
> It's not as simple as just being in existence. There's
> alot of 'trust' to it too, Countries could easily
> diversify against the USD on their reserve baskets. The
> CNY isn't a significant proportion of any basket
> because of the lack of trust & free liquidity with it.
I'm not quite sure what you're referring to here. What are countries' "reserve baskets"?
Central banks hold bonds as assets on their balance sheet, not medium of exchange. These assets are what the medium of exchange is issued against in the first place. I'm arguing that it is not possible for foreign central banks to just choose to switch out US Treasury bonds with Chinese government bonds, because the Chinese bonds have terrible liquidity -- and bond liquidity isn't particularly good in times of crisis to begin with.
Central Banks usually have to hold reserves of other countries currencies, or more generally a basket of reserves that it can use with another Central Bank for the purposes of trade or moving capital beyond the border.
Say I buy a container of iron ore from Australia from the US, the process needs money to flow to Australia. In this flow the Federal Reserve would provide to the Reserve Bank of Australia (RBA) some of the assets in this currency basket to back its claim, it simply says the RBA is owed that (and subsequently the RBA can use that against USD trade, or use that against some other trading partner).
So this way that the person I buy ore from in Australia has his credit in his account backed by something intrinsic (owed to him by the RBA, owed to the RBA by the Fed). No money has really flowed between countries, just the Fed owes the RBA assets in this currency basket as a result.
This communication is done using the Bank for International Settlements which allows these reserves to be exchanged between other countries when they trade amongst each other. Hence it's important the basket contain assets that are universally acceptable and can store value. It used to be Special Drawing Rights, and before that Gold.
The Federal Reserve's gold hoard is also amongst this basket. The terminology remains from the basic function of exchange accounting under the Bretton woods system, in principle using fiat instead of Gold. This method was devised to avoid countries having to ship gold to each other. They could simply owe it to another Central Bank and trade against that.
The bonds are stored in a different form as part of their monetary policy, the functions in this sort of basket is part of the Fed's function with international settlements.
The obvious reason why the rmb could become a global currency is lots of companies buy and sell stuff from china, imports and exports, so they come to accumulate it. They want to trade it for other things, so the rmb comes to be used and more. Of course it doesn't float free, and the country limits transactions across borders. But I could see it slowly becoming more used as a universal currency, if they stop controlling the exchange rate and stop limiting capital flows. Those are 2 big changes, but the more they slowly relax those controls, the more likely they will succeed.
> So the dollar, in its current form, was born a gold certificate, that then transmuted into a currency.
It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).
You're confusing two things. Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold. Foreign central banks could redeem their dollars for this amount of gold. The USD gold price did not vary back then. The USD gold price only started floating after 1971, which is just a fancy way to say that the market (surprisingly!) didn't consider a 0% haircut acceptable for a defaulted debt obligation.
Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
I'm arguing that just like gold pre-1971 "stabilized" the price of the US dollar, post 1971, oil is serving the same stabilization function: setting a "real world value" for the US dollar.
> Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0]
> Before 1971, the US Dollar was worth exactly 1/35th troy ounce of gold
Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did.
The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).
treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...
treasury bonds are not illiquid at times of crisis, we recently had one and the treasury market operated smoothly throughout. all the other markets however...
US fiat currency has only existed for 45 years, which is less time than your outside range for "proof that its a stable currency."
edit: Apparently, since you are missing my fucking point, asking for 3-5 decades of currency stability before someone would be comfortable using a currency is insane. Communist China isn't fucking going anywhere.
I'm not downvoting you, you do present an important point but I think history has accepted the fiat currency. A currency's stability isn't defined in terms of its convertibility into Gold. A currency naturally evolves with the economy.
The USD itself has existed for over 150 years. While I do understand your point it's markets at a whole that decide these things. The USD is very good at storing its value if you were to compare all the other currencies from the plethora of countries out there. Keep in mind there were other currencies also pegged to Gold & Silver.
In the late 1890s there was a dem politician, William Jennings Bryan who played a part in this. I guess its one of those things that caught on.
Edit: Didn't ready that you mentioned 3 decades is too, long. Actually it's too short, a currency's best test is how it stands inflation & recession - just they come around once a business cycle, which is excruciatingly long.
I didn't argue against fiat currency. I argued against FUD against China's currency based on stupid ideas. I do think that the difference between a gold-backed and fiat currency is a valid difference, but would never advocate for a gold backed currency because storing gold in vaults is stupid when we can use it for actually useful things instead. Knee-jerk internet-argument STEMlords jumped on the word fiat without actually understanding the context.
In all honestly we haven't seen China in a recession yet, so we don't know how they deal with it, we also don't know how they deal with inflation with a free floating exchange rate, and if their currency is stable with it. With the others, CHF, CAD, GBP, USD we've seen it all many times & know they can maintain their currencies value well & their government budget well.
You can't imagine being a central bank governor and risking a country's reserves on this just for the sake of glory. For what reason would you hold your country at so much risk & uncertainty?
It's also possible that people understood your argument but downvoted you because your first comment's tone was frantic, angry, and inappropriate for HN.
This comment is a bit better, but still insults the people you hope to convince. These insults only harm your cause.
It's not about the words, it's about how angry and negative you sound in what should be a relaxed and civil discussion. If you said that to my face I would abandon the conversation and try to calm you down.
You are free to do whatever you want with the dollars you have. So is the US Federal Reserve. That's the difference--not only does the PBOC insist on freedom of action for itself, its government insists on strict limits on freedom for all held Yuan.
Silly question: is the US dollar being the world's go-to currency part of the US's national interests? If so, how big of an interest is that to the US? If "yes", and "very" are the answers, I wonder if Yuan can ever replace US dollar without a fight.
It's totally in the interests of the US to have people, governments and companies to give the US cash in exchange for bonds instead of giving that cash to other governments, like China.
Maybe. A lot of people assume that it is, but there isn't really good evidence that that's the case. The clear cut benefit is that drug dealers and rich Russians keep big stacks of $100 bills in vaults, but besides that it gets murkier. That said the US government certainly seems to think it is in our interest and work to maintain it.
It's in the interests of consumers and importers, and against the interests of producers and exporters. Given that 70% of GDP is consumption, consumers together have much more political and economic power than producers, so their interests tend to prevail when that interest is collective and unitary.
The RMB and Yuan seem like good longterm investments IMO despite the current volatility in Chinese markets. The one thing however that is concerning is China's abilities to counter US attempts to devalue and destabilize their currency, much like what occurred to the Euro in the collapse of '08. During the time preceding, the Euro was a great contender, not so much anymore. Also the collapse of the Yen spurned by American economic manipulation.
One noticeable difference to add is Japan and the EU are US military dependents and therefore by logic also US economic dependents. The Chinese are not. Not sure how that would value in calculations, but it is a significant factor.
Nah, that is so softball. The US will hit them with something that has far more leverage. China has a severe weakness and that is the capacity to feed their population and the hundreds of millions of young single Chinese men who will never find a spouse. Food, water, and women willing to take on Chinese spouses.
I would almost buy the food argument, but there aren't all that many American women lining up to marry Chinese men. I'm sure such people exist, but not in numbers sufficient to alleviate this particular issue. American men marry non-Americans, but for the most part American women do not.
> The RMB and Yuan seem like good longterm investments IMO despite the current volatility in Chinese markets.
Debt to GDP is 282% and on a trajectory to hit 500% if action is not soon taken. There is no long term upside if debt is not reduced.
> China's abilities to counter US attempts to devalue and destabilize their currency
China's exchange rate is set by China alone. If there is destabilization taking place it is capital fleeing China in anticipation of a debt crash and asset bubble implosion.
> the collapse of the Yen spurned by American economic manipulation.
The Yen is suffering from a demographic crisis where younger workers are far outnumbered by an aging population. This is problem in a number of countries.
Hopefully you're being paid in USD to post this propaganda.
Sure, you can cherry pick your data all you want. If we look at their infrastructure and military costs, they are within the ballpark to recover gracefully.
As for currency manipulation, did you conveniently forget that the US bailed out the banks to the tune of trillions with no jail times except for one lower end employee? Their own economic manipulations and fraud created a bubble that collapsed the Euro, strengthening the dollar.
Long term perspective is still quite good, and although you want to sputter your freedom eagle bullshit at anything you think is non US, it remains an attractive invest and forget investment option.
130 comments
[ 3.5 ms ] story [ 35.0 ms ] thread(I don't know enough about currency trade.)
https://www.bloomberg.com/news/articles/2015-11-03/china-dev...
For the same reason BNP Paribas paid the record 9 bil USD fine to US, even though it is a French bank.
What the regulation does, is to protect against attack on the currency on the open market, like 1997 SE Asia one. Obviously Chinese are currently holding an opinion, that this protection is currently worth more than uncontrolled investment.
I doubt it's that simple. Does that Chinese currency law have any force in the UK?
I'm by no means knowledgeable about this, but I'd imagine it's more like any bank that offers yuan accounts in the UK would necessarily need to be able to do business in China to make the accounts useful, subjecting it to Chinese law. Since the Chinese government forbids the latter, the former is loses its appeal. So a London bank could take yuan if it had no Chinese presence, but it wouldn't want to.
When I spend a Dollar, the business that gets it puts it in a bank account. That Dollar can (theoretically) be taken to the issuing bank, in this case the Fed, by the business' bank, in order to get something of value.
To enforce the trading of Yuan, the Chinese we do not value Yuan held by in foreign accounts (or in the case of the "international" Yuan, it's value is restricted). So now those pieces of paper you have with Chinese lettering (or that account valued in Yuan) has nobody that gives it value... it's worthless.
Think about if the dollar (or the euro) was worth more or less depending on where you were...
That's not equivalent to saying: Yuan may become a "world go-to currency" if China manages to remove many communist-style controls from it and demonstrates their intent to make it free-to-trade by allowing Yuan free-to-trade for a continuous period of 50 years at the least.
The article doesn't say this with such a detailed clarification and required qualifications to claims. Hence it seems like a propaganda coming from a communist dictatorship rather than a well researched article.
Imagine asking yourself the same thing about the US Dollar, Yen, even the Australian dollar, Pound over their entire timespan as a floated exchange rate. They've never been any illusions about it, it's WYSIWYG. You can't freely move CNY out of China to start with. Imagine having your savings, or backing your business on such a currency.
I guess eventually it's possible, say after more than 3-5 decades of proof that its a stable currency
Specifically, since 1983, it has been pegged to the current rate.
However, after the initial deprecation last year, I saw the writing on the wall, and got the money out. It wasn't easy, but it wasn't impossible either. Chinese citizens can exchange $50K USD a year, which doesn't seem to be going away, while foreigners can exchange what they earn in China...with proper tax documentation (it took a few weeks to complete my initial forex).
Investment opportunities in China really suck! You have the bubbly real estate market, the insider trader stock market, and foreigners are actually very restricted from doing either of both anyways (we can't buy stocks, acquiring property is tricky, not that I would want to do either). The only reason I kept my money in China was because of the appreciation, investments also weren't doing well at the time.
I can see the RMB being a serious currency..it isn't that messed up compared to say the Venezuelan Bolivar, or many currencies in SE Asia or even the Indian Rupee. Heck, the Japanese Yen is even more volatile, and I would have lost big time if I made bets on the pound or the Australian dollar. But the lack of convertibility, even if only partial, is a big show stopper. They really should make more effort to that, and they seem to have stalled for the last 10 years while walking backwards from the reforms of the early/mid 00's.
Price discovery is extremely important, even if it comes with volatility. It would be comforting to know that China could reinvest its trade surplus back into the US, which it's not doing well since it's not incentivised to do so, solely investing in Treasury's. This is why we're in a recession, because this cash is a drag on consumption, and its stuck in Treasuries.
The money isn't really the government's...it needs to be somewhat liquid and ready to use elsewhere. Treasuries are fairly liquid (you can't redeem them early, but you can always trade them) and are not very risky (though these days they often have effective negative interest rates).
Earlier this year, my wife and I were in China helping her mom close an old bank account to move the money to Hong Kong (she's been an HK permanent resident for over a decade). It was almost $10k USD worth. The easiest option was to get it all in cash and take it back to Hong Kong. The largest RMB note is the ¥100, which is about $15 USD. Our pockets were stuffed with hundreds of notes. It felt very awkward. Even though it was legitimately our money, I was afraid at any moment I'd be pulled aside and charged with some kind of crime.
So yeah, I don't see RMB as very practical when the largest note available is equivalent to $15. Pretty much necessitates that every moderately large transaction will go through a bank, under the watchful eye of the Chinese government. I can't see many foreigners being interested in that kind of arrangement.
The Chinese border police don't look into money laundering or structuring that much. Much easier to go after the iPhones and milk powder.
The problem with that is that a LOT of Chinese people cannot buy a house. They simply don't have the liquid money or the same access to credit that American's do (for better or for worse).
So what they have now is a glut of supply in their housing market (built upon credit), with a lack of demand. And really there is no way for the Chinese government to create that demand. They can't go the QE route because your currency is restricted. You don't have diversified industry to kickstart. Steel is down. And you're already saddled with both domestic and foreign debt.
I'm no economist, but the future isn't that bright for China. Imo a Chinese collapse could be worst than an American one.
We will live in interesting times, for sure.
1.) Yuan is being printed massively (it hit a credit-to-gdp ratio of 30 to 1 http://www.bbc.com/news/business-37403363)
2.) it is a non-fully-convertible currency
3.) there are severe restrictions for yuan to move out of the country due to capital controls. max $50/year. also, $15k/year withdraw restrictions (http://money.cnn.com/2015/09/30/news/china-overseas-atm-cash...)
4.) no one is required to use yuan for trade.
5.) nobody wants yuan outside China. people in China are desperate to exchange yuan for other things inside China.
All the conditions are there for hyperinflation to occur. Might happen early next year when europe and China both likely reject China's market economy status, and starts imposing tariff on Chinese imports heavily.
What does that mean?
http://www.reuters.com/article/us-china-usa-trade-idUSKCN0ZU...
http://thediplomat.com/2016/07/market-economy-status-for-chi...
The argument is essentially that China's economy doesn't function as a proper market economy. That too much of its economy is directly governed by State controlled or owned corporations. That prices in its economy don't function enough based on market influences. An example of this would be their vast dumping of steel and some other industrial products, while their government continues to directly subsidize the dramatic over-production despite large losses in the steel industry.
Which is true. I really hope this happens, it's time for China to start playing by the rules of a real market economy or lose access to the global market. We should not tolerate China subsidizing their industry, at the expense of other industrial countries.
However, this is true of any country.
Fortunately for China, at least in production capacity, China has no worry here.
I see no reason any central bank would want to swap out their Treasury bonds with Chinese government bonds (Treasury bonds are already too illiquid in times of crises, which is when we really need it), or any reason either consumers or merchants would want to start using the Yuan, other than to pay for imports from China.
It's not as simple as just being in existence. There's alot of 'trust' to it too, Countries could easily diversify against the USD on their reserve baskets. The CNY isn't a significant proportion of any basket because of the lack of trust & free liquidity with it.
All in all, full employment matters more than currency perception overseas, at least if its done using free market forces, such as the purchase of bonds in the secondary market for QE.
>It's also that the US doesn't play games with it's currency,
Let's call a spade a spade. Sure, the US wasn't directly affecting rates. But a the time the financial world was burning, and people were flocking to (and holding) the Dollar for shelter. QE 1 2 and 3 were 600B, 600B and a monthly 85B. That much money put into the market keeps rates down simply because of supply influx.
There's more vexing things that would affect this perception such as the credit rating, especially with so much debt. Yet History says the managers in government, and the Fed are good at their jobs. So even despite the QE perception on money printing the issues with this haven't been much of an issue, or it would have shown up with a weaker dollar/diversification away from USD on central bank's balance sheets
There is certainly an enormous inflation of the money supply but you don't see and feel it because it is sitting idly in bank accounts or is invested in bonds, the stock market or real estate. (here we actually see inflation)
Once the holders of this money decide to move it out of these asset classes you are going to see inflation, because all of this money created by the FED does actually exist now.
Of M0 or 'narrow' money, yes. But the broader money supply was shrinking as loans defaulted. Arguably QE was an attempt to equalise the total (broad) money supply, and price inflation can be expected if QE money is not withdrawn as new loans are made, or rather, as the total amount of debt increases, creating broad money through fractional reserve banking.
To reverse the gov must buy the bond back with money from general taxation, on doing so the bond is redeemed and destroyed, and the central bank erases the money it received back in tandem with the bond.
Basically it's all smoke and mirrors, the various obligations (to redeem the bond, to do so with real money, etc. are all legal bindings and mechanisms that can be signed away with sufficient political support, thus reducing the whole process to good old fashioned money printing).
Which is never going to happen. (at least in this political system) Currently Western governments can barely keep things running by increasing their debt at an almost exponential rate.
But this is already a normal part of the process. The government rolls over its debt as bonds mature, so the Fed can just take the money when the bond matures and not buy new bonds. That would force the government to borrow existing money from individuals and other countries instead of creating new money through the Fed, effectively taking that cash out of circulation at the cost of an increase in interest rates.
Also, the Fed bought corporate bonds under QE, so this isn't just a question of the government printing money to cover budget shortfalls.
Here is a graph:
https://fred.stlouisfed.org/graph/?s%5B1%5D%5Bid%5D=AMBNS
Of course these people are going to diversify because they can see the writing on the wall. So what are they going to invest in? Tangible assets like real estate. Here in the EU real estate has basically doubled in price during the last 4 years and people complain that they can't afford the rent anymore, yet the governments have been successful in convincing the majority that it's actually these evil Capitalists who are the cause for this.
But I am going to make my case that governments should stop manipulating the markets whenever I want because it hurts the majority. (not me though, I've actually profited greatly from this. I'd still prefer it to be fair for everyone because I do not fear competition - competition actually gives me great pleasure whether I win or lose)
People have this idea that with QE officially over the Fed's balance sheet will shrink over time, but it's not true. Bonds that were purchased under QE are replaced with new bonds as they mature, so it's effectively printed money.
This is just the kind of fiddling you don't want to see when you're holding currency.
It's nothing new in fact its near bog standard. This process is done with the lower maturity instruments when interest rates are higher by matching it up to the federal funds rate by purchasing or selling them & rolling them over in the exact same fashion (with this 'printed'/reserve money as well). It's just this is done using longer term assets instead.
That's the theory. I doubt it will ever actually happen, though, since whoever makes that decision will be blamed for any poor economic performance that follows.
I would never consider buying Yuan over Dollars but I simply cannot agree with this statement. What the FED has been doing since 2008 and the ECB with the Euro is a massive experiment in gaming the markets which could possibly lead to catastrophic event. At least in the case of the EU I have no doubt that this will happen.
Today when you buy commodities or currencies your success or failure is not determined anymore by what the market believes is valuable or not, but instead by what governments and bureaucrats have decided should be valuable or what should go down in value. I am fundamentally opposed to this because it creates a lot of bad behaviour, corruption and governments ending up owning previously privately held property and companies.
It is not inconceivable that we could see various Western governments ending up owning most of the property in their countries in the next decades. That'd certainly be a creative way to implement Communism, I'll give them that.
Central banks hold bonds as assets on their balance sheet, not medium of exchange. These assets are what the medium of exchange is issued against in the first place. I'm arguing that it is not possible for foreign central banks to just choose to switch out US Treasury bonds with Chinese government bonds, because the Chinese bonds have terrible liquidity -- and bond liquidity isn't particularly good in times of crisis to begin with.
Say I buy a container of iron ore from Australia from the US, the process needs money to flow to Australia. In this flow the Federal Reserve would provide to the Reserve Bank of Australia (RBA) some of the assets in this currency basket to back its claim, it simply says the RBA is owed that (and subsequently the RBA can use that against USD trade, or use that against some other trading partner).
So this way that the person I buy ore from in Australia has his credit in his account backed by something intrinsic (owed to him by the RBA, owed to the RBA by the Fed). No money has really flowed between countries, just the Fed owes the RBA assets in this currency basket as a result.
This communication is done using the Bank for International Settlements which allows these reserves to be exchanged between other countries when they trade amongst each other. Hence it's important the basket contain assets that are universally acceptable and can store value. It used to be Special Drawing Rights, and before that Gold.
The Federal Reserve's gold hoard is also amongst this basket. The terminology remains from the basic function of exchange accounting under the Bretton woods system, in principle using fiat instead of Gold. This method was devised to avoid countries having to ship gold to each other. They could simply owe it to another Central Bank and trade against that.
The bonds are stored in a different form as part of their monetary policy, the functions in this sort of basket is part of the Fed's function with international settlements.
https://www.ethereum.org/token
Source: looked on in dismay as the (legacy) treasury trading system at an investment keeled over and died the day after Lehman ate shit.
It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).
Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
> Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0]
[0] https://en.wikipedia.org/wiki/Petrocurrency
Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did.
The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).
Come to think of it, I believe the Chinese people have come to the same conclusion?
US fiat currency has only existed for 45 years, which is less time than your outside range for "proof that its a stable currency."
edit: Apparently, since you are missing my fucking point, asking for 3-5 decades of currency stability before someone would be comfortable using a currency is insane. Communist China isn't fucking going anywhere.
The USD itself has existed for over 150 years. While I do understand your point it's markets at a whole that decide these things. The USD is very good at storing its value if you were to compare all the other currencies from the plethora of countries out there. Keep in mind there were other currencies also pegged to Gold & Silver.
In the late 1890s there was a dem politician, William Jennings Bryan who played a part in this. I guess its one of those things that caught on.
Edit: Didn't ready that you mentioned 3 decades is too, long. Actually it's too short, a currency's best test is how it stands inflation & recession - just they come around once a business cycle, which is excruciatingly long.
In all honestly we haven't seen China in a recession yet, so we don't know how they deal with it, we also don't know how they deal with inflation with a free floating exchange rate, and if their currency is stable with it. With the others, CHF, CAD, GBP, USD we've seen it all many times & know they can maintain their currencies value well & their government budget well.
You can't imagine being a central bank governor and risking a country's reserves on this just for the sake of glory. For what reason would you hold your country at so much risk & uncertainty?
This comment is a bit better, but still insults the people you hope to convince. These insults only harm your cause.
You can't do this here. Please comment civilly and substantively or not at all. We detached this flagged comment from https://news.ycombinator.com/item?id=12598347.
https://news.ycombinator.com/newsguidelines.html
But doesn't the federal reserve consider the value of the dollar against other currencies in its rate making decisions?
Yes, there are different degrees of currency manipulation.
In short, US debt and money supply cannot keep pace with global asset growth. One or the other must (and is) giving way.
One noticeable difference to add is Japan and the EU are US military dependents and therefore by logic also US economic dependents. The Chinese are not. Not sure how that would value in calculations, but it is a significant factor.
Debt to GDP is 282% and on a trajectory to hit 500% if action is not soon taken. There is no long term upside if debt is not reduced.
> China's abilities to counter US attempts to devalue and destabilize their currency
China's exchange rate is set by China alone. If there is destabilization taking place it is capital fleeing China in anticipation of a debt crash and asset bubble implosion.
> the collapse of the Yen spurned by American economic manipulation.
The Yen is suffering from a demographic crisis where younger workers are far outnumbered by an aging population. This is problem in a number of countries.
Hopefully you're being paid in USD to post this propaganda.
As for currency manipulation, did you conveniently forget that the US bailed out the banks to the tune of trillions with no jail times except for one lower end employee? Their own economic manipulations and fraud created a bubble that collapsed the Euro, strengthening the dollar.
Long term perspective is still quite good, and although you want to sputter your freedom eagle bullshit at anything you think is non US, it remains an attractive invest and forget investment option.