• Sat
  • Dec 20, 2014
  • Updated: 2:17pm
Jake's View
PUBLISHED : Sunday, 02 March, 2014, 3:42am
UPDATED : Sunday, 02 March, 2014, 6:35am

Beijing's foreign exchange policy nothing but a silly game


Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.

The mainland's foreign-exchange regulator said recent volatility in the yuan's exchange rate is normal, while playing down the possibility of large capital outflows, in a statement apparently aimed at easing market concern over a sharp currency depreciation.

South China Morning Post, February 27

Call me an artist: I always say a picture explains things best, and my chart on China's net capital flows certainly says all you need to know about why Beijing is playing silly games with the yuan again.

Let's get it straight first of all that this is indeed silly games. Until anyone in the mainland can take money freely in and out of the country, the yuan remains officially defined as funny money. There is no such thing as "normal" in the yuan exchange rate. Normal market forces do not determine it.

It is rather central government policy that is the operative factor here and, lest you think that policy results from the considered deliberations of informed experts, yuan policy over the last two years has been set by a huge crack-the-whip gyration in the balance of payments.

The chart shows you that capital inflows suddenly collapsed in 2012 and the year ended with a net outflow of almost US$100 billion.

It did not happen purely as a matter of chance. It happened because at the beginning of 2012 the authorities took the view that the yuan had strengthened enough since they had begun pushing it up two years earlier. As the second chart shows, they thus let it weaken a little against the US dollar. Almost instantly speculators decided they no longer saw a good bet in the yuan and fled. They had only come to the yuan because its steady appreciation against the US dollar had given them a currency translation profit. With that gone, they were gone.

"Hmmm …," said the smart fellows in Beijing, who thought that weakening the currency was a good idea. "Perhaps we should go the other way again."

They promptly did, the yuan strengthened once more, the speculators came back, and now the preliminary figures for 2013 show that capital flows turned positive again, with a net inflow of US$240 billion.

"Good," the smart fellows said last week. "So now we'll try to push it weaker again." And it's my bet that they will once more get exactly what they got in 2012 if they continue of this mind. I don't know if the yo-yo was invented in China, but I have never seen one swung to quite such extremes as this.

The simple fact is that the talk of an offshore yuan market hangs on little more than speculative purchases of yuan. People outside China are happy to take yuan in payment for trade goods only because they hope to turn a profit on the exchange rate. There is otherwise no natural offshore market for yuan.

This in turn says that Beijing will have to pay dearly if it wishes to maintain the illusion of the yuan as an international currency. If it stops pushing the yuan up, the illusion will pop like a soap bubble.

In short, it's just a silly game.


For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive



This article is now closed to comments

Its funny money....try to change it for hard currency outside of China and your suitcases full cannot be exchanged for toilet paper...
In his discussion of RMB
JvdK has over stressed fx rate
and overlooked other determinant factors
such as interest rate, tax rate, effective ppp, … etc
He is saying funny money is used by over a billion people in China
to facilitate their daily economic activities
which manufacture smart phones that help the world connect
and produce clothing and shoes
to spare hundreds of millions in the world
from going about nude and barefoot
It’s because of “funny money” China is so polluted
Carried away by schadenfreude, China haters are blind
to the fact that pollutions are costly to produce
Is the Fed’s manipulation of money supply
or London banks’ effective rigging of Libor
part of natural market forces?
Please remind me:
when did UsK last freed their currencies from fx control?
To paraphrase JvdK’s conclusion:
“US will have to pay dearly if it wishes to maintain usd as an international currency
if it STOPS
printing money and manipulating interest rate to feed and healthcare
the country’s unemployed and unemployable millions
by an ever increasing budget deficit
and STOPS running the world’s biggest military,
the illusion will pop like a soap bubble”
In goD we trust
You’d wish the greenbacks in your pocket were toilet paper
if China dumps uncle sam’s iou and obliterates the fx market
ouch !
Ooh dear..thought the experts in HKMA thought it was real


SCMP.com Account