RMB Finally Goes Strong

This afternoon, I got a SMS from Eric that RMB finally changed its policy and become floating rate. The rumar is the exchange rate between RMB to USD may change to 8.1 or something (I cannot find sources and proof for this. So use this information with caution).

I am not an econmist, and I don’t know exactly what it means to the market and two countries. I did get some conflicting oppinions and news. It is out of my knowledge scope to judge. So I don’t want to comment. The direct impact for me may be, the next time I shop at Amazon.com, I can buy one more book if I buy several books. :-)

P.S. Oh. Talking about Amazon, I read the news the change after they bought one of the largest book selling website Joyo. 1) All the employees start to learn English, while before, they don’t have any English test in their interview processes. 2) The founder left the company and top management team were replaced by external professional managers 3) Their system migrated to Amazon platform, 4) After the migration, their shipping speed is 2 days slower than before – now one day slower than its major competitor Dangdang.com.

16 Comments

  1. It’s just the start of RMB revaluation.

    I believe it’s the right time to buy more properties now.

  2. Yuan’s not exactly free-floating. If the yuan were really left to the market’s own device, the appreciation of yuan would far exceed 2%. The Chinese government will not allow that to happen because that could lead to a massive capital flight and an extremely volatile market at least for the near term. This is of course only a guess–no one can truly predict the Chinese government’s next moves–but I think RMB will only be allowed to rise at a pace where there’s little possibility to profit from speculative currency trading, i.e., return from the stock market will equal or exceed that from the currency market. This is hardly surprsing–We all know the Chinese have always favored gradualism over shock therapies.

    When will the real estate craze come to an end? Or will it? I always wondered if there’s anything uniquely Chinese to real estate booms. In the U.S., wherever there’s a significant Chinese population, the prices of homes and luxury cars (what economists call conspicuous consumption) are always higher. It could be possible that Chinese are drawn to these areas where demands for homes and luxury items are high, i.e., lots of rich people, but could the Chinese actually be driving up these prices?

    :) Trying to determine causality is an economist’s eternal plight…

  3. Yuan can only be truly free floating when the RMB is fully convertible into other currencies. This move to 8.11 to the USD is more political to economical – to avoid head on confrontation with the US.

    JS, interesting story about what Amazon did to Joyo after their acquisition. I have the same experience years ago when I sold my company. The acquirer brought in a very arrogant US educated MBA hot shot as the Managing Director. This hot shot eventually pushed out most of the senior staff that has been with the company for over 20 years and replaced them with younger recruits. In the process service quality deterioated. To cut a long story short, the hot shot managed to turn a solidly profitable business into a loser.

  4. yes, its just a political move. A greater appreciation of the RMB wouldn’t be favorable to China. Chinese imports to the U.S. for example would be more expensive, so there will be less demand for Chinese goods as a result. American tourists who come to China will realize less value in their money.

    The floating exchange rate has been urged by the United States in order to help the deficit and strengthen domestic demand. However Greenspan explained that it wouldn’t help very much.

    In my opinion, more expensive Chinese imports in the U.S. may cause a very mild rise in the price level in the U.S. if the RMB value shot up. This would just cause a rise in the inflation level of the U.S. economy. Minimum wage would rise, unions will complain … etc etc.

    just my opinion

  5. Read from the news, the floating will be restricted within 0.3%. And at same time, the interest rates of USD and HKD are increased.

    …the new system is not exactly a free floating system yet, I would more consider it still as a pegged system… difference is that instead of pegging RMB to USD only, now RMB is pegged to a basket of currencies including USD, EUR, JPY etc., and a bit more flexible with a restricted floating range.

    Personally I think it’s a wise decision to make small moves and test the consequences before any big change.

  6. The implication of the methodology adopted for the Chinese basket is that the currency can appreciate (depreciate) by 0.3% a day versus the $. This is not, therefore, just a 2.1% reval, but a move that is potentially more open-ended. ie, it can appreciate – theoretically – by 0.3% a day. The implications are therefore much stronger than a once-off revaluation.

    Technically, the new regime is called “crawling peg”.

  7. Well… revaluation of Yuan by 2.1% means that Chinese goods are now 2.1% more expensive everywhere outside China, and foreign goods imported to China are 2.1% cheaper. It could also be seen that, in a way, every Chinese traveller has 2.1% more to spend in other countries, while China as a travel destination is 2.1% more expensive. Inside China (if you have savings in RMB or fixed assets in China) it doesn’t necessarily mean anything. But if you had plans to buy foreign currency, foreign products or invest to outside China, or if you reside in China while you get paid in currency other than RMB, you just “lost” 2.1% there.

  8. According to an article issued by Deutsche Bank, the reform of RMB exchange rate regime which was strictly pegged to USD before and will use a basket of major currencies as MCGJCN mentioned will be positive impact on airline, auto, real estate and utility companies and negative impact on electronics, textile, some chemical and basic materials.

    Price of housing is going to slow down from the beginning of this year, but after appreciation of RMB, with “hot money” flooding in real estate much more and quickly than before, the price would go up again, is it possible? if it is really happened, what’re kinds of policies the goverment would release to control the price of housing?

  9. You said:

    Joyo. 1) All the employees start to learn English, while before, they don’t have any English test in their interview processes.

    ———————————————————

    joyo had english test in tech dept.

  10. China should maintain an independent foreign/monetary policy. Looking one’s national self-interest is the country’s first priority.

  11. Wangjianshuo, this is a little off-topic but it came to my mind when reading an article (sorry– don’t have the link here) about the loosening of the renminbi and its impact on Chinese state industries: When is China finally going to institute a REAL ANTI-SMOKING CAMPAIGN and improve the health of the Chinese people?

    I hate to sound as though I’m lecturing here (and I’m sorry if you are a smoker yourself), but I read in the article that close to 40% of Chinese people are smokers. That’s utterly outrageous and incredibly stupid!!!!! Do you know how expensive the health costs for smoking are in the USA, where we have much lower rates of smoking than in China?

    The reason I bring this issue up in the thread here is that, as the article mentioned, most of China’s tobacco products are sold by state-owned companies that make a big profit by effectively poisoning the Chinese people. Because of this, the anti-smoking drive in China has been relatively stifled, and the Chinese authorities blatantly and stupidly claim that smoking is actually *healthful* to people.

    As someone who’s worked in the health care field for years, this made my blood boil. Nothing, and I mean absolutely nothing, is more needlessly and idiotically harmful to one’s health than smoking; it causes not only lung cancer but also emphysema, bladder cancer, heart disease and brain aneurysms, plus it makes people’s skin sag and look awful by the time they’re in their early 40’s. It is literally costing us trillions of dollars in health expenses in the US.

    I’ve visited China many times and I love the country, so I’m not saying this to sound mean (and in fact I’m hoping this advice might be beneficial), but I have to be honest and state a hard truth here: China will never become a strong country if it continues to kill its citizens by encouraging smoking like this. It’s the most outrageously stupid government policy I’ve ever seen.

    While the Chinese authorities have done some dumb things, they’re not stupid, and I’ve been pleasantly surprised at many of Beijing’s initiatives against AIDS and infectious disease recently. What, if anything, is the government finally doing to stop the dreaded costs of smoking in China?

    (BTW, the loss of revenue from cigarette sales need not cost China’s state-owned industries anything, even with the RMB revaluation. In fact, China’s companies could instead turn a hefty profit by sternly encouraging smokers to quit, then selling the various drugs and ingredients– as well as providing counseling sessions– that help smokers to quit. China needs to start this process now, right now, before the country is bankrupted from the health consequences of smoking.)

  12. Oh and, one more way for China to boost state revenues while cutting down on the colossal health costs of smoking: Just steeply raise the taxes on tobacco products! Out in California, where I did some of my training, they raised taxes on tobacco and got the best of both worlds– reduced smoking (and lower health care costs), combined with increased tax revenues into the state. There were also tax credits for people who undertook quit-smoking initiatives.

    Chinese tobacco farmers need not suffer too much; it’s easy to subsidize them to switch from producing tobacco to, instead, producing products like sweet potatoes, nuts or tomatoes, as many farms in e.g. Kentucky in the USA have managed to do.

  13. I agree this is a political move to appease the Bush government but the Bush government policies are economically unsound. Actually dangerous. Why?

    Forcing the rmb to float only makes Chinese goods more expensive in the USA. We have a trade deficit because labor intensive goods are made more cheaply in China than the USA. So now when I go to buy clothes at Walmart the clothes will become more expensive over time as the RMB increases in value. The theory that we can sell goods more readily in China is not viable. China still is very poor in the rural areas they wont be buying cars or computers anytime soon. The impact far more effects American consumers than will help american companies.

    China is the second largest holder of US treasury notes they will move to higher yielding assets or lose money this will actually generate higher interest rates in the US affecting consumption.

    If the rmb were to appreciate substantially it would create chaos in China. Companies like Walmart, nike, all the computer related companies would relocate to other countries with cheaper labor (like India) forcing many people out of work. In the short term big buyers like Walmart would force the cost increases back on their suppliers who would cut workers pay and benefits.

    It will only make real estate speculation worse as purchasing properties in RMB will yield greater profits from dollar investors if they see the rmb increasing in value. There is no benefit to local chinese accept higher prices. Tourism from the USA would be severely impacted as now a beer that cost 30 rmb at an 8 to 1 ratio is about 3.80 on a 4 to 1 ration would be 7.60.

    This reminds me back in the 1980’s when Japan was the bad country with the big budget surplus taking all our money all the tariffs etc did not change a thing. The Hong Kong dollar is pegged to the us dollar and there has never been a complaint about it not floating freely.

    I first came to China in the early 1990’s. The country was just settling down after the Tianemen Square upheavels. People literally did not want to take rmb because they had lost confidence in the stability of the country. Pegging to the dollar provides a strong measure of stability and I think that is what we would want rather than undermining a weak banking system and creating social instability.

    My sense is the rmb will increase in value till it equals the hong kong dollar ( this makes bookeeping alot easier) then it will not change much from there. The Chinese government is very sensitive to social unrest and wont add to it by free floating which leaves the country at the mercy of currency speculators after all Bush will be out of office in a few years.

  14. Real estate prices in Shanghai will probably continue to appreciate the rmb situation aside. Shanghai is becoming one of the great cities of the world on par with New York, San Francisco etc. As the city attracts more attention more people will want to live and work there. Look at prices in San francisco, Hong Kong etc They are probably triple Shanghai so I would not expect a return to cheap prices unless their political turmoil or an economic collapse.

  15. RMB will be the new euro the us dollar will decline in value. Companies from abroad will call China the new united states.

  16. HELLO,

    WE ARE IN NEED OF A PRIVATE SELLER OF RMB (CURRENCY) FOR A PRIVATE BANK TO BANK TRANSACTION. MY CLIENT (THE BUYER) IS READY TO PROCEED FOWARD AND HAS BEEN CLEARED AND APPROVE TO BUY. MY CLIENT (THE BUYER) IS CURRENTLY BUYING FROM THE MINISTRY. DISCOUNTS CAN BE DISCUSS BETWEEN BUYERS BANK OFFICER AND SELLERS BANK OFFICER. BUYER WILL BE USING USD TO PRUCHASE THE RMB. COMTRACT SIZE UP TO 1T. PLEASE NOTE MY CLIENTS (THE BUYER) BANK OFFICER WILL HANDLE THE ENTIRE TRANSACTION, BANK TO BANK, BANK OFFICER TO BANK OFFICER. POF, CLIENT INFORMATION, PASSPORT ECT………

    FINALLY, PLEASE MAKE SURE IT IS A PRIVATE SELLER. WE ARE SEEKING PRIVATE SELLERS ONLY! I CAN BRING THE BUYERS OPERATIONAL MANAGER TO THE LINE FOR CONFERENCE CALLS TO BEING WITH. THANK YOU SO MUCH IN ADVANCE FOR YOUR TIME AND EFFORDS. PLEASE LET ME KNOW IF YOU CAN ASSIST US.

    FYI……… ALSO THESE ARE THE NAMES OF PEOPLE WE DONT WANT TO DEAL WITH…. TBA. IF THESE ARE YOUR SELLERS OR MANDATES YOU DEAL WITH, WE RESPECTFULLY DECLINE IN ADVANCE.

    Respectfully,

    Mr. Edward McGowin

    Financial Investor

    Charter One Funding and Investors Group

    charter_investors@yahoo.com

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