Wednesday, July 27, 2005

Stability, Speculation, and the Fixed Exchange Rate

Angry Bear has some good posts and comments here and here on the RMB revaluation, and specifically the issue of the fixed exchange rate that China adhered to for ten years.

Here's my two cents on why the Chinese government stuck with a fixed exchange rate for so long (and why major exhange rate changes in the future will occur by government fiat at carefully chosen intervals, and not as the result of a "free float").

I think the Chinese government clung to the 8.28:1 exchange rate for so many years because it wanted to discourage speculation while encouraging a relatively unfettered export trade.

Their forex regime is designed to make things reasonably uncomplicated on the current account, with the understanding that with a fixed exchange rate it's not worthwhile for importers and exporters to game the system with fake import and export contracts that would allow them to cycle dollars through their businesses and take advantage of the pre/post revaluation spreads.

The ingenuity of China-based enterprises in coming up with scams like this is limitless. The art is already highly developed in the techniques of transfer pricing to sequester funds overseas to reduce stated profits and to enable the offshore purchase and reinvoicing of imports at artificially low prices before they crossed the Chinese customs gate.

A fixed exchange rate was preferable to the enforcement headaches and bruising of the precious entrepreneurial spirit that would be required in trying to crack down on the fraud (abetted by corrupt government tipsters) and flood of illegal speculative cash that would accompany a fluctuating exchange rate.

As the Chinese government always takes pains to point out, it didn't manipulate the RMB/US$ exchange rate, as the U.S. has accused it of doing. It did just the opposite and had kept the rate fixed where it was since 1995 even as the value of the dollar drifted away.

That the Chinese government had to bow to political pressure and discard this stable system for one in which the currency becomes more vulnerable to speculative attack is a fact that probably doesn't make them very happy.

I wonder if the People's Bank of China will surrender to the guilty pleasure of confounding current and potential speculators with a transitory devaluation--a bull trap, you might say-- but I don't think the momentary satisfaction would be worth the international dismay that such an overt manipulation of the forex regime would evoke.


Free Traffic System said...


I liked your blog. I found many interesting information here.
I also give free info about demo forex free on my
href="">Forex Trading System

If you have time please visit my web site to get some free demo forex free

Kind regards,

Anonymous said...

vibram five fingers footwear
?While using cute look like people are nervous, it's funny to see these comfortable shoes, you feel much better

five fingers shoes
I added the veracity on the street

monster beats discount
Capacity to bring completely new vibrams five fingerssweep shoes every OVE

Monster Beats Lebron James
A typical human foot is one of the anatomy associated with 26 bones, Thirty three joints, 20 muscle tissue and admire the particular hundreds of sensory receptors, muscles and ligaments

A few runners reflect the Vibram Five Fingers Dash for execution, a new stimulating work produced completely changed in order to meet better the world concern the hair with your arms, so it may seem like the actual mass activity in the race, not only the particular anatomy of the plant, but relax guy

Vibram Five Fingers Kso Womens