August 10, 2005
Yuan and Chinese financial market reforms
China has announced the composite currencies in its new reference basket in managing the yuan. The major currencies are the US dollar, Euro, yen and Korean won. Smaller members of the basket are the Singapore dollar, British pound, Malaysian ringgit, Russian rouble, Australian dollar, Thai baht and Canadian dollar. As expected, the weightings are based on foreign trade flows, which means the US dollar will continue to dominate the basket.
Did you spot the obvious omissions? No New Taiwan dollars, and no Hong Kong dollars.
At the same time the PBoC have liberalised financial markets, allowing more participants in the spot forex market, introducing interbank forex forwards and allowed the trading of yuan swaps. Below the fold is a Reuters article on these changes. But at the same time, the PBoC announced it is tightening its supervision to ensure a "stable, orderly market". Liberalising with one hand, but tighter supervision with the other. How can you tighten supervision when previously the market was Government controlled or banned?
Meanwhile, 3 of China's biggest securities brokers received RMB1.45 billion in soft loans as part of the ongoing bail-out of the sector.
Update (18:00) A bit of research reveals if the basket weights are based on the currency trade is denominated in, the US dollar weight should be around 52%, Euro 15%, Yen 13%, Won 8 and the others all around 2%.
Sun Bin discusses the RMB peg mechanism and some thoughts on its implications.
00:37 10Aug2005 RTRS-CORRECTED - UPDATE 2-China expands yuan forward marketposted by Simon on 08.10.05 at 12:13 PM in the China economy category.
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Four Must Reads
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Tracked: August 10, 2005 06:10 PM
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It may make sense to leave out HKD due to the peg. The TWD? Perhaps it's in there but they aren't saying. Though there are arguments that this isn't really a proper trade-weighted basket, and that USD remains the anchor, in which case a TWD component wouldn't make too much difference.posted by: myrick on 08.10.05 at 07:38 PM [permalink]
The only reason you'd add the Hong Kong Dollar to the basket is if you expected HKD to be un-pegged from the US Dollar any time soon. I don't think anyone is predicting that to happen, even Beijing.posted by: Beau on 08.11.05 at 05:35 AM [permalink]