Bank stance to ease inflation risk

Editor's note: The decision by the People's Bank of China, the central bank, to "further strengthen the formation mechanism of the yuan's exchange rate and increase the flexibility of the currency" on Saturday has aroused worldwide attention for its far-reaching effect on both the Chinese and global economy. The next day, the central bank released another statement claiming that there would not be a one-off revaluation of the yuan, which is well in line with Chinese economists' expectations, who said outside pressure would not disappear following the latest move.

In the short term, it is more important for the monetary authorities to let the yuan float in a broader band rather than pegging it to a basket of currencies.

Given the recent exchange rate movement of the world's major currencies, if China strictly follows the rule of pegging the yuan to a basket of currencies, it may depreciate substantially against the US dollar. But the central bank will not allow that to happen, especially when the exchange rate issue has become highly sensitive.

The yuan could appreciate 3-5 percent against the US dollar this year. The Chinese authorities will not accept a big increase in the yuan's exchange rate against the dollar, because the yuan's effective exchange rate has risen substantially against the greenback this year and the trade surplus is shrinking.

The new announcement of the yuan's exchange rate regime, which has been interpreted as the start of yuan appreciation, does not mean that outside pressure for yuan appreciation will disappear. The pace and margin of the renminbi's rise against the US dollar will become the main theme for the next round of discussion on the yuan's exchange rate.

Once the yuan resumes appreciation, the authorities must keep a close eye on cross-border capital controls and prevent resurgent excess liquidity as a result of rising asset prices.

China remains in the stage of initial industrialization while the US has entered a post-industrial era.

The root of the huge US trade deficit with China lies in the differences in their economic structures and development levels.

The yuan's exchange rate is neither the main contributor to the bilateral trade imbalance, nor a panacea for solving the issue.

A sharp one-off revaluation of the yuan's exchange rate will significantly increase the cost of living of ordinary Americans, especially low- and middle-income groups, because it would push up the cost of Chinese exports to the US market, thus curbing US domestic consumption, which is important for its economic recovery.

Yuan appreciation will result in a decline in the growth of China's exports, from which migrant workers, China's most vulnerable group, will suffer the most.

Sluggish exports in turn will impact China's long-term efforts to expand domestic demand and transform the economic development pattern.

So far, China is the most powerful driving force for global economic growth.

A slowdown in China would deal a blow to economic confidence worldwide and affect the smooth recovery of the global economy.

The decision of the People's Bank of China, the central bank, to proceed with the reform of the yuan's exchange rate regime is of great significance, because it symbolizes the end of China's temporary yuan peg policy to mitigate the impact of the global financial crisis over the past 23 months. Such a move also indicates China will adopt an independent exchange rate regime without yielding to external pressure.

The move aims to relieve inflationary pressure and promote the structural adjustment of China's export-oriented enterprises.

The yuan's exchange rate will become more flexible and is likely to experience two-way fluctuations in the future, which means the exchange rate of the yuan may either appreciate or depreciate against major currencies. If the euro continues to remain weak against the US dollar or the value of the US dollar rises by a large margin against other major currencies, the yuan could depreciate against the dollar.

Therefore, the central bank's latest move cannot be simply interpreted as the start of yuan appreciation against the dollar. Even if the yuan appreciates in the future, according to historical experience, the central bank will keep the currency basically stable at a reasonable and balanced level and allow the yuan to appreciate in a gradual, moderate and controllable way instead of a sharp one-off revaluation.

The recent adjustment in China's currency policy is a move in the right direction, marking a key step in the reform of China's exchange rate regime towards a more market-based one.

If the yuan rises against other currencies after the latest policy initiative, it should rise gradually, otherwise it could be a heavy blow to the country's export-oriented enterprises.

Mild yuan appreciation will spur export companies to continue to improve their technology and management, but a hasty and big increase in the yuan's exchange rate would be the death knell for these companies. The 11 percent appreciation in the yuan between October 2007 and July 2008 led to the bankruptcies of some 67,000 export companies and mass job losses.

It is expected that the yuan will only go up within a limited range. European economies face the risk of a double-dip and have decided to cut spending to fight the debt crisis, which will definitely affect consumption in those countries and thus pose a threat to China's exports to Europe. If the yuan rises against the dollar this year, the margin would only be very slight. China will allow its currency to appreciate by up to 3 percent only if the country could make sure its exports rise by an average of 20 percent in 2011 and the global economy regains its sound growth momentum.

The central bank's decision helps contain "imported" inflationary pressures and therefore reduces the probability of aggressive monetary tightening through stringent credit controls and/or consecutive interest rate hikes.

This policy move should help contain inflationary pressures in the short term and rebalance the Chinese economy over the medium and long term.

A modest initial revaluation followed by gradual appreciation would fuel expectations of further yuan appreciation over time.

Unpegging the renminbi and a subsequent gradual appreciation against the US dollar should be positive for the stock market, even though a stronger renminbi will likely hurt low margin exporters who do not have pricing power.

Although the central parity of the yuan-dollar exchange rate is, in principle, determined based on the weighted average of the quotes from market makers, it is still heavily managed by the People's Bank of China, which has considerable discretion over determining the weights when the weighted average is calculated.

Thus, the pace of renminbi appreciation ultimately hinges on how comfortable the Chinese authorities are with allowing faster appreciation of the central parity rate instead of intra-day volatility around the central parity rate.

Source: China Daily
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RMB reform restarts, to aid China and world

Analyzing Beijing's announcement over the weekend it will restart the reform of the RMB exchange rate regime, China observers say the move is "wise" which will accelerate the country to climb another step on the industrial ladder.

More than a dozen economists and international investment bankers welcomed Beijing's decision to un-peg the RMB with the U.S. dollar from today, but, they cautioned that China's regulators would try to prevent any big volatility in the exchange rate, which does not help China's and the global economy, and is likely to rein in the scope of the yearly rise of the RMB value against the U.S. dollar within 3-4 percent.

Economists believe an annual 3-4 percent rise of the RMB will be capable of stonewalling speculative "hot money" entering China, which will jeopardize the economy and increase the risks of inflation in the country.

Since the People's Bank of China (PBOC), the central bank, initiated the RMB rate reform in July 2005, China's currency has gained 21 percent against the U.S. dollar. But Beijing pegged the RMB to the greenback in late 2008 when the global financial crisis erupted.

Now fairly ensured the global economic recovery is on a solid footing and its exports had rebounded since April, Beijing finally decided to enhance the RMB exchange rate flexibility, to help squeeze out low-value labor-intensive production, and to sooth rising outside cries that the RMB must be revalued.

U.S. President Barack Obama said China's move is a "constructive step" while the International Monetary Fund director-general Dominique Strauss-Kahn described the move as a "very welcome development".

"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement.

The European Union said that "such a move will be beneficial for both the Chinese economy and the global economy," adding that the move would not only benefit China's own economy but also the economy of the world as a whole. EU even hailed the move as "providing an important contribution to the success" of the G20 Toronto summit, which are scheduled for late this week.

Beijing's decision was made in view of the economic situation and financial market developments at home and abroad, and the balance of payments situation in China, the PBOC spokesperson said in a statement.

The reform of the RMB exchange rate regime is to reflect market supply and demand "with reference to a basket of currencies", that including the U.S. dollar, the euro, the yen, the British pound, and other currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market, PBOC said.

The statement emphasized the RMB be pegged to a basket of currencies, adding that the US dollar should not be the only gauge for judging the RMB exchange rate level.

The central bank said on Sunday it will not conduct a one-off revaluation of the RMB exchange rate this time, as promised by Premier Wen Jiabao. On July 21, 2005, when China started the reform, it allowed a one-off RMB rise of 2 percent against the U.S. dollar.

U.S. Treasury Secretary Timothy Geithner also welcomed China's decision to further reform its exchange rate mechanism and expected further cooperation with his Chinese counterpart within G-20 to promote the economic recovery.

By People's Daily Online

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China yuan stability pledged

 

China's currency policy has been criticised by the West 

 

China's central bank says it plans to keep the Chinese yuan "stable" and there will be no immediate revaluation of the currency. 

The comments come just a day after the bank announced plans to make the exchange rate more flexible.
But Chinese authorities have ruled out a large, one-off adjustment in the exchange rate.

China has come under increasing international pressure to change its currency policy.

The US in particular has complained that China is artificially keeping the value of the yuan low to help its exporters at the expense of foreign competitors.

On Saturday, US President Barack Obama welcomed China's promise of increased flexibility in exchange rates, but the Chinese central bank's latest comments cast doubt over the scale of its plans.

"There is at present no basis for major fluctuation or change in the [yuan] exchange rate," the bank's website said.

G20 agenda

  The "basic stability" of the currency would be maintained, it added, and keeping the yuan at a "reasonable, balanced level" would help ensure economic stability.

"The management and adjustment of the [yuan] exchange rate needs to be done in a gradual way."

Continue reading the main story

The timing of China's exchange rate move is hardly accidental

Stephanie Flanders BBC economics editor Read Stephanie Flanders' blog

 

China has effectively pegged the yuan to the US dollar for the last two years.

In 2005, it briefly allowed a controlled appreciation of the currency, but ended that policy when the global economic crisis threatened demand for its goods abroad.

The yuan has stayed at around $0.147 since then, and would be expected to rise higher given a totally free exchange rate.

Analysts expect the yuan to appreciate slowly - by around 0.2% a month - in line with a recovery in demand from Europe.

"A stronger yuan would not only help prevent trade tensions from developing later in the year, but, more importantly, would help to keep China's recovery on a sustainable path and to rebalance its economy," commented Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong.

China's currency policy was expected to be high on the agenda at the G20 summit to be held in Toronto later this month.

According to the BBC's economics editor Stephanie Flanders, the timing of China's concession is no coincidence.

"As usual, the wording is vague," she said.

"But the assumption must be that China plans to move back to the policy of allowing its exchange rate to appreciate in real terms against the dollar."

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China reiterates no one-off moves in RMB exchange rate reform

June 21, 2010

The People's Bank of China (PBOC) said Sunday it will not conduct a one-off revaluation of the RMB (yuan) exchange rate.

The PBOC said it will keep the yuan basically stable at a reasonable and balanced level and manage and adjust the RMB exchange rate based on the floating bands previously announced in the interbank foreign exchange market, a statement posted on its website said.

The PBOC aims to promote China's balance of international payments while safeguarding the stability of the nation's macro economy and financial markets, the statement said.

The statement came one day the PBOC announced it would further promote the reform of the RMB (yuan) exchange rate regime and increase the flexibility of the RMB exchange rate.

The move is in line with China's long-term fundamental interests, as it promotes the economic structure adjustments which will lead to sustainable growth.

The floating currency exchange rate will help guide resources to the service industries, which will upgrade the industry while reducing the nation's trade imbalance and its reliance on exports, the statement said.

The statement also said a flexible currency exchange rate regime will help curb inflation and asset bubbles and create a more favorable international development environment for China.

Sunday's statement emphasized the yuan be pegged to a basket of currencies given its close ties with a number of trade partners, adding that the U.S. dollar should not be the only gauge for judging the RMB exchange rate level.

Trade between China and the European Union in the first five months of the year accounted for 16.3 percent of China's total foreign trade volume, the statement said.

The United States, East Asian nations, and Japan accounted for 12.9 percent, 10.1 percent and 9.4 percent, respectively, according to the statement.

The PBOC decision signals its intention to leave the market more room to set the yuan's value, which is an irresistible trend and also a condition for the internationalization of the RMB, said Shen Minggao, Citibank's chief economist for greater China.

China moved to a managed floating exchange rate regime based on market supply and demand and referencing a basket of currencies on July 1, 2005.

The government narrowed fluctuation of the yuan's exchange rate in 2008 to keep the currency stable, in a bid to counter the global economic downturn, the statement said.

"A stable yuan was not only in the interests of China - it helped mitigate the impact of the global financial crisis," the statement said.

In the long run, currency reform will boost employment in the services sector, the statement said, adding that a floating exchange rate will prompt exports to shift to intensive processing, which will expand the industrial chain and create jobs.

But the statement noted a gradual adjustment is necessary to give enterprises time to adjust their business structure.

Source: Xinhua

 

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'Social Network' poster, Web site unveiled

Actor Jesse Eisenberg plays Facebook founder Mark Zuckerberg in 'The Social Network,' coming out this fall.

(Credit: Columbia Pictures)

 

"YOU DON'T GET TO 500 MILLION FRIENDS WITHOUT MAKING A FEW ENEMIES," reads the tagline on the first official poster for "The Social Network," the upcoming Columbia Pictures film about the origins of Facebook.

The all-caps text covers the entire poster, superimposed over the face of young actor Jesse Eisenberg, who wears an expression of awe on the cusp of metamorphosing into malevolence. In "The Social Network," due in theaters this October, Eisenberg plays Mark Zuckerberg, who founded Facebook in his dorm room at Harvard University and ultimately turned it into a digital empire with nearly 500 million members. In a skinny side bar on the poster--which is otherwise dominated by Eisenberg's face, tousled curly hair, and sloppy gray hoodie--the title "The Social Network" is laid out in the manner of Facebook's own font and navigation bar, with the movie Web site 500millionfriends.com depicted as though it had just been typed in a search box.

Blogger Nick Douglas called the poster "beautiful" and "ready-made" to go viral on the Web, noting that the placement of the logo makes the whole thing look like it's on an iPad.

This is a movie that Hollywood is taking seriously: with director David Fincher ("Fight Club," "Zodiac") working with a script by Aaron Sorkin ("The West Wing") and a cast of well-regarded young actors, there are now rumors that Columbia parent company Sony Pictures Entertainment is pushing back the release date of the next Gus Van Sant film, "Restless," to January in order to focus end-of-year marketing energy and potentially Oscar buzz generation on "The Social Network."

The movie, however, doesn't have Facebook's blessing. Based on author Ben Mezrich's ribald, unauthorized tell-all "The Accidental Billionaires," the storyline doesn't present a favorable view of Zuckerberg. Facebook has dismissed the tale as fanciful gossip, but audiences who've read unfavorable headlines recently about the company may think differently.

By Caroline McCarthy, a CNET News staff writer, is a downtown Manhattanite happily addicted to social-media tools and restaurant blogs. Her pre-CNET resume includes interning at an IT security firm and brewing cappuccinos. E-mail Caroline. 

 

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Is Google far too much in love with engineering?

It's nice if a pilot has a background in flying. It's really quite special if a colonoscopist has a background in medicine. But does everyone who heads up a department at Google really need to have a background in engineering?

I should be lying in the sun rather than pondering this existential mind-twister, but I was moved past reluctance by a blog post written by Don Dodge, developer advocate at Google.

Dodge, who used to perform advocacy at Microsoft, wrote this post to celebrate surviving--I'm sorry, I mean enjoying--six months at Google.

In a section titled "Engineering Rules!," Dodge offered the following: "Google has always been driven by outstanding engineering talent. Google hires only the best engineers. The legends of complex interview questions and coding problems are true. Educational achievement is valued at Google."

Do complex interview questions really test your educational achievement? Or do they merely test your ability to answer complex questions asked by, no doubt, complex people--people with certain complexes--in an interview situation?

But even that mind-number isn't the one that keeps me from the sand.

It was this: "Engineers are at every level, starting at the top, in all kinds of positions at Google. Nearly all the top management at Google have engineering backgrounds. Marketing, sales, business development, product management, are all more likely to be former engineers."

My troubled educational achievement suggests to me that Dodge is holding up this intellectual monochrome of leadership as a good thing. He is suggesting that this is a company that is so immersed in engineering that only those who understand its complex rudiments can be trusted to, say, market Google's products.

I believe this is an image from a Google presentation called "The Joys of Engineering Leadership."

(Credit: CC DailyLifeofMojo/Flickr)

 

This is how Dodge explained it: "The engineering background brings a rigorous thought process that questions assumptions and requires accurate data in the decision process. That doesn't mean every decision will be perfect, but it will be based on data...not opinions."

Perhaps some will be heartened, given how much information Google manages to collect about their everyday interests and proclivities, that Google is a company where opinions do not rule.

Yet there is something slightly shiver-making about this supposed data worship. It might remind some of frenzied arguments they have had with the lovers when one party screams at the other: "You just don't understand me! You're not an engineer!"

Is it really possible that there exist so few human beings beyond the educationally superior dome of Google who might not be able to muster an idea or two about how Google might market its highly complex engineering products? You know, like those highly complex all-copy ads that sit at the side of search results?

Does one really need a background in engineering to wonder how best to offer real people, whose closest relationship to engineering might come every time they go over a bridge while humming along with their iPods, a browser?

And how much of an engineering background does it take to decide which of 41 shades of blue really is the right one?

Please, I don't wish to offend the world's greatest engineering talents. Whether they work for Google or not. If I say something too mean, I know they have the power to sever my ability to communicate with the world.

They could prevent me from watching Justin Bieber videos. They could steal information from my Wi-Fi signals, reveal all the e-mails I have written to my closest friends, Cameron Diaz, Lady Gaga, and the archbishop of New York. They could make it so that my garage remote control will never work again.

However, I wonder whether such slight, but no doubt data-driven, infelicities, such as the launch of Google Buzz, the riotously misguided home page designs, or the launch of Nexus One, might have done with one or two fewer data-driven managers and one or two more people who offered suggestions about what real people like and how they might react?

Google does many interesting and clever things. But, at this stage of its development, its office does seem to be full of too many people with the emotional maturity of Dwight Schrute.

At a time when the company needs to create more products that become an essential part of real people's lives, it often seems incapable of communicating the worth and, dare one suggest, the magic of such products to those very people.

In my fanciful though intellectually inferior way of thinking, I can see the head of Google's marketing department walking into a Parisian bakery, ordering the most exquisite pastry, tasting it, delighting in its complex wonder until his lips are moist beyond imagining.

Then he hears the lady behind the counter say: "Ze baker. He has a degree in archaeology."

A true Googlie would, naturally, put the pastry down and walk out of the bakery. Well, at least that's what the data would tell him to do, wouldn't it?

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By Chris Matyszczyk is an award-winning creative director who advises major corporations on content creation and marketing. He brings an irreverent, sarcastic, and sometimes ironic voice to the tech world. He is a member of the CNET Blog Network and is not an employee of CNET.