Tuesday, June 22, 2010

basket, band and crawl (BBC)....Can China Maintain it

Just came across this acronym in web and was quite amazed at its usage in real world , am not sure of its usage in real time .John Williamson, a Washington-based UK economist credited with developing the BBC. This policy can give central banks the  flexibility to respond to changes in both local and global conditions to maintain export advantage and control inflation.

And here is how its related to present context :

Here is the Transcript from PBC on Renminbi(or Yuan --Chinese Currency) policy change which
led to rally in global markets across the world. I have been tracking this news for a couple of days though not clear at its consequences . Now why all of sudden Chinese changed there stance from pegging with  dollar to a flexible rate ( Though this flexibility will be debated in coming days across the board rooms )
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
There is a lot of pressure from US on China about exchange rate peg and how its creating  global imbalances and  us-may-label-chinacurrency-manipulator by June 20 if China doesn't take any steps ..and China did take a step on June 19th (Saturday evening or Sunday morning ) so as to avoid a report from US which was supposed to come in mid April got delayed to June 20 on labeling China as currency manipulator
Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.
 US is pressuring china to abandon the policy of pegging yuan to dollar and to go for a floating exchange rate BBC  looks like this has worked out and for time being it allowed a float rate with in a small band of 0.5% and if currency hits the boundaries then it might intervene in the markets .
This 0.5% band move is for a day  and the risk of currency fluctuations is very less and US may pressure to increase the Band...I guess this would take some time to implement as China bought some time from US by making changes to the policy and thereby not labeling it as currency manipulator for time being

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

Pegging yuan to dollar for past 2 yrs led to unfair advantage to China and by increasing its share of exports which led to Global recovery.
China´s external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.

Economists think China faces a potential challenge in introducing a managed float, since a small revaluation would continue to attract speculative foreign capital in anticipation of further currency appreciation. As a result, China may have to widen its currency trading band to gain market acceptance.

For a short term time period its a positive news to the market especially metals sector and Textile sector.
But i am afraid its just the cheap money flowing into the marker for now..and anytime the flow can be reversed

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