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谢国忠

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麻省理工学院经济学博士

个性介绍: 1960年出生于上海,1983年毕业于上海同济大学路桥系,1987年获麻省理工学院土木工程学硕士,1990年获麻省理工学院经济学博士。同年加入世界银行,担任经济分析员。在世行的五年时间,谢国忠所参与的项目涉及拉美、南亚及东亚地区,并负责处理该银行于印尼的工商业发展项目,以及其他亚太地区国家的电讯及电力发展项目。1995年,加入新加坡的Macquarie Bank,担任企业财务部的联席董事。1997年加入摩根士丹利,任亚太区经济学家,2006年9月辞去该职务。

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yuan devaluation is unlikely   

2008-12-26 17:31:02|  分类: 言论 |  标签: |举报 |字号 订阅

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人民币不会贬值

Yuan devaluation is unlikely

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Thefollowing article was written last Monday and is in the current issueof Caijing Magazine. Like in 1998 the speculation over potential Rmbdevaluation is a hot topic. I don't think it will happen at all. TheChinese government doesn't want it. The market can't enforce it unlessdollar really shoots up. I think dollar's bounce is over and dollarwill make new lows in the next twelve months. What the Fed is doing isto bring the whole yield curve close to zero. The only way for themarket to price in the Fed actions is to depreciate the dollar. Ofcourse, if other governments do the same, all currencies will devaluetogether through inflation. Stagflation, not deflation, is the centralpath for the global economy in the next two years or even beyond.


Merry Christmas and Happy New Year!



Andy




Caijing Magazine

Yuan devaluation is unlikely

Andy Xie

Dec 21, 2008

Marketexpectation on Rmb has reversed. Instead of expecting permanentappreciation depreciation expectation is gaining traction. I think thatYuan-dollar cross will be stable over the next twelve months. But, bothRmb and dollar will likely depreciate against other currencies in 2009.In 1998 the Yuan-dollar peg played a stabilizing role, though theyappreciated against other currencies. In 2009 the peg will again play astabilizing role, though they will depreciate together.



Everyemerging market currency comes under depreciating pressure after a boutof appreciation. Emerging economies need cheap currencies (as innominal exchange rate vs. purchasing power parity exchange rate) todevelop, as they need to attract investment with future appreciationpotential to offset the risks in emerging economies). The emergingmarket discount declines when an economy becomes more developed. Thelower the per capita income, the cheaper the currency. From time totime we have emerging market euphoria to upset this relationship. Theconcept of BRIC became the focus of euphoria in the past three years.All sorts of theories were invented to justify the appreciation oftheir currencies. The enthusiasm turned into speculation as speculatorsborrowed yen and dollar to buy assets in these countries. Theircurrencies appreciated under the flow pressure.



Thestory, as in previous emerging market bubbles, has turned out to be adollar-driven story. The dollar went into a bear market in 2002. Thedollar index dropped from 120 in 2002 to 79 in 2004 or 34%depreciation, staged a mild 15% recovery between 2004-06 on the Fedrate hikes, and dived aftrewards on declining property price to a lowof 72 or 40% from the peak early in 2008. The dollar index has staged avigorous rebound since July to a recent high of 88 or 20% up from thebottom. It seems that the driver for the dollar's strength isdeleveraging in emerging markets rather than good news from the US.Much of the dollar weakness since 2006 was due to the popularity ofderivative products that essentially borrowed dollars to buy emergingmarket assets. For example, the 'Accumulator', aka 'I kill you later',may have borrowed $100 billion US dollars to buy Hong Kong-listedChinese stocks.



The unusual strength of yen isanother sign that the driving force in the currency market isdeleveraging. Yen was more popular than dollar as a funding currencyfor speculation in risk assets due to its low interest rate. Yen hasstrengthened against the dollar during the latter's rebound. The crossof yen-Australian dollar has collapsed by half in 2008, reflecting thepopularity of borrowing yen to buy high yielding Australian dollar.



Emergingmarket currencies have gone back to their 2006 levels. Some like Koreanwon has gone further due to its domestic problems. In contrast ChineseYuan has stayed up. At the same time China is more dependent on exportsand, hence, is more affected by the current downturn than otheremerging economies. Ceteris paribus, Chinese Yuan should depreciatealong with other emerging market currencies.



Further,China's monetary easing has further to go than other economies. China'sdeposit reserve require ratio ('RRR') at 16% has a long way to fall. Asthe RRR falls, Rmb supply will rise. At present the banks are unwillingto lend. Like in the US, monetary loosening is merely causing liquidityto pile up within the banking system without increasing lending. But,as the fiscal stimulus gets into full swing next year, banks will lendto government projects. The Rmb value would come under more pressurethen.



China is still running a substantial tradesurplus, which should support the currency. But, the surplus maydecline substantially in 2009. The increase in trade surplus now is dueto imports falling faster than exports, which reflects weak investmentdesire and, hence, less capacity for exports next year. Hot money isalso unfavorable. The stock of hot money in China's banking system ishard to estimate. It is probably hundreds of billions. When theeconomic situation is as poor as now, it would probably flow out.



Thereare positive factors to offset the above negative factors. The dollar'srebound is either over or quite close to the end. The unwinding of thedollar leverage in emerging economies is mostly through. For example,the unwinding of the Accumulator contracts is mostly complete. Asglobal banks are facing high cost of capital, they are obviously eagerto pull back the loans behind such derivative contracts. There is stillmomentum in selling emerging market currencies, especially forcommodity economies like Russia on their weakening export outlook. But,the selling is probably just momentum. Emerging market currenciesshould stabilize soon and will likely strengthen against the dollar in2009.



Unlike in 1998 emerging market currencies won'tcollapse this time. Then emerging economies had fundamental dollarshortage then. They invested their borrowed dollars inefficiently andhad to write off their investments through devaluation. With someexceptions emerging economies don't have dollar shortage in the currentcrisis. They have been running large trade surpluses for ten years andhave large foreign exchange reserves. On the flow basis there isn't astrong case against their currencies.



From the US sidethe fundamentals for the dollar are deteriorating. First, despite avery weak economy, the US continues to run around $50 billion tradedeficit per month. When a bubble bursts, the trade deficit shouldshrink quickly. I expected this for the US early in 2008. This is justnot happening. The persistent trade deficit is a negative factor forthe dollar.



Second, the returns on dollar-based assetsare quite low. The price-book ratio for S&P 500 is 1.7, far higherthan the average of 1.3 for other markets. Against its historicalaverage of 2 the 15% discount is probably insufficient to compensatefor the risk during a financial crisis. The price-book ratio of S&P500 averaged 1.3 during the bear market between 1972-82 and 1.1 between1932-52. The US stocks are just not attractive from historicalperspective or against other markets. On the fixed income side, theshort term rates are quite close to zero across the board. The 10 yeartreasury is only yielding 2.6%. Indeed, the treasury market is probablya bubble as panic causes money piling into this market. Only distressedassets in the US may be attractive in 2009 as financial institutionsunload the assets on their books. This market will not be big enough tooffset the unattractiveness of the US's stocks and bonds.



Third,the US will have a huge budget deficit. Excluding aids for the ailingfinancial institutions, the US Federal government will incur over $1trillion in budget deficit. The supply of treasuries will flood intothe market as soon as the Obama Administration comes in. The US won'thave enough money at home to support this market. The need to attractforeign money will put pressure on the dollar.



Thedollar was strong in early 1980s when the US ran large twin deficits.But, the dollar was supported by very high interest rate. The Fed thenraised the Fed funds rate to double-digit rate to crash inflation. Incontrast the Fed is cutting the Fed funds rate to nearly zero and istalking about quantitative easing. The combination of low interest rateand twin deficits will cause the dollar to weaken in 2009. Indeed, Ithink that the dollar may make a new low within two years, i.e., thedollar index dropping below 71.



The outlook for Rmbdepends very much on how the dollar trades against emerging marketcurrencies. China obviously has a competitiveness problem. Its vastexport sector has had profit problem for the past three years. Thedemand collapse now is forcing numerous exporters to close. Theeconomic pain is acute. At the same time the vast property developmentindustry is also coming under acute pressure. It has expected price andsales to surge. The reality is that the price may need to decline by30-50% to sell the inventories. If Rmb continues to appreciate, itwould put further pressure on the price. Hence, unless the dollarreverses its direction, Rmb depreciation may become inevitable. This iswhy I am talking so much about the dollar direction here.



Themarket factors, of course, don't always decide. Government, even iftemporarily, can use its power to move exchange rate its way. China has$2 trillion in foreign exchange reserves. If it wants to defend theexchange rate, it has enough ammunition to stave off market force for along time. Hence, it is important to understand the government'sconsiderations.



Chinese government has shown apreference for a strong currency since 1994, at least in relation tothe dollar. In 1994 China abolished its dual exchange rate system andset the combined exchange rate at 8.9 against the dollar. It slowlyappreciated to 8.3 by the end of 1997. When the Asian Financial Crisishit, China resisted devaluation. The government argued that a Chinesedevaluation would set off another round of competitive devaluation,which would hurt China eventually. The exchange rate was kept at 8.3until 2005. Under political and market pressure, the governmentappreciated Rmb's value gradually to 6.8 against the dollar. The upwardtrend stopped three months ago when the problems in the export sectorbecame explosive.



The case against devaluation made tenyears ago is even stronger today. China's exports have probably becomethe largest in the world this year. A Chinese devaluation wouldcertainly set off competitive devaluation by others like Korea andSoutheast Asia. China may not gain much from devaluation. Further,devaluation won't fix the demand problem. The global economic crisishas to run its course. China will suffer during the process even if itscurrency is devalued. On the cost side, devaluation will help exportbusinesses to survive. But, their survival may not last. China willlikely lose big chunks of shoes, furniture, and garment businesses toBangladesh, Indonesia and Vietnam. China has lost competitiveness inthese industries. Devaluation can only delay the exit of theseindustries from China.



China's economic difficultiescan be alleviated by fiscal stimulus and solved by economic reforms andglobal economic recovery. The room for fiscal stimulus is stillplentiful. The proposed issuance of Rmb 500 bn fiscal bonds (1.6% ofGDP) is at the low end of my expectation. It should be doubled as soonas possible. A big chunk of the proceeds should go to support laid-offworkers. Migrant workers who work for export businesses are forced togo back to their home provinces after they are forced out of theircompany dormitories. The exodus is putting enormous pressure oninterior provinces that have little fiscal resources to deal with thesituation. The central government should put in a temporary relief forthese workers through a special budgetary allocation. It should be doneas quickly as possible to prevent a social crisis.



Devaluationwon't solve the employment problem at all, I believe. It may triggerhot money to leave and deepen the property market downturn, which woulddecrease demand for migrant workers. A big chunk of the fiscal stimulusshould be used for cash subsidies for property purchases. First, thegovernment should give cash subsidies to households who are qualifiedfor low cost housing to purchase in the commercial market as Hunanprovince is doing. Second, the government can subsidize threepercentage points in mortgage interest rate. Third, property purchasecost should be made tax deductible. All three benefits should go tofirst time buyers with caps on total purchase prices. If these policiesare put in place, they can support the labor market far better thandevaluation.



Chinese government has a natural desirefor maintaining the dollar-Yuan cross during a crisis. It has plenty ofroom on the fiscal side to support the economy. And a devaluation mayhave unintended consequences to worse the labor market. From theseconsiderations the government is likely to defend the exchange ratewhen under pressure. It has the resources to withstand conceivablemarket pressure in the foreseeable future.



Chinesegovernment may support Rmb depreciation if the dollar risessubstantially from the current level. Its probability is quite low, Ibelieve. The reduction of dollar leverage among emerging markets hassupported the dollar's strength in the past four months. The financialand economic situation in the US will remain more challenging thanelsewhere for the foreseeable. When the dollar leverage in emergingeconomies is all unwound, the dollar should decline again, which willremove the depreciation pressure on Rmb.


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