Comments on: Currency shoot-out

By: Berneice Sutler

Berneice Sutler — Mon, 18 Jul 2011 02:58:13 +0000

Hi I love that you are right in the mix of public “feedback” and are involved in the discussions (however banal they are). Keep up the good work and, of course, the good design!

By: Carry on, Traders! The carry trade and capital controls | Critical Twenties

Carry on, Traders! The carry trade and capital controls | Critical Twenties — Mon, 10 Jan 2011 13:22:46 +0000

[...] year, I wrote about the build-up of international hostilities on the currency war front as China and the US faced off against each other on China’s interventionist policy of [...]

By: Anisha

Anisha — Fri, 12 Nov 2010 14:49:01 +0000

Thanks, Ruchira! For what it’s worth, I don’t really think it’s fair to equate the actions of the RBI and the PBC. The scale of intervention by the PBC is really quite mindboggling, with their reserves equal to more than half of their very large GDP. It’s like a huge country! The RBI also seems to have scaled back the extent of intervention in more recent years after a more rapid acceleration in the early 2000s.

Enormous reserves are a waste of real resources and in today’s environment where dollar denominated assets earn a pittance, they create big losses for the central bank/government. For a country like China, it’s (apparently) a worthwile cost because of the huge benefits in terms of trade.

Would China switch to SDRs? I’m not sure. I know they dont like the fact that the US is depreciating its currency which leads to capital losses on dollar reserves, but I don’t think they can afford to switch the reserve currency independently of others. For one thing, it may bust their strategy of maintaining an undervalued exchange rate vis a vis the dollar.

Interestingly, a shift to SDRs as reserve might force China to allow the yuan to appreciate somewhat, depending on how the terms of the restructuring are defined. So if the G20 really wants to get its act together in terms of reducing global macroeconomic imbalances, one strategy could be switching to a global “reserve currency”. Even in this case, though, I suspect a lot of countries may want to hang on to some dollars…

By: Ruchira

Ruchira — Tue, 09 Nov 2010 14:19:44 +0000

Anisha, this is a great post.

The RBI has been following the same policy as the PRC for years now. Our reserves aren’t as great as China’s but they’re going up every year. We do use it to finance our BOP but we’ve accumulated far more than we need and it is getting expensive.

I believe China keeps threatening to convert its reserves to SDRs or at any rate, has been quietly doing so. A depreciating dollar is in no country’s interest because everyone’s reserves are in the dollar.

Is China in a political position to take the world away from the dollar? What do you think will happen to the world economy if China makes good on this threat?

By: markbrownn

markbrownn — Tue, 19 Oct 2010 11:35:51 +0000

thanks for the article

By: Anisha

Anisha — Sat, 16 Oct 2010 11:31:10 +0000

Hey, thanks for the comment! Lessons from the East Asian crisis: I think there is quite a strong sense of once-bitten, twice-shy in most emerging markets, especially in Asia. This is one reason they’re complaining a lot about the current US-China face-off. Korea and Thailand are already trying to limit capital inflows and Indonesia and Malaysia are considering steps as well. Obviously, unlike during the East Asian crisis, most economies no longer peg their currency to the dollar, which allows them a lot of flexibility in dealing with currency outflows. But this obviously means that currency appreciation will hurt their exports, and capital inflows on this scale can still contribute to financial fragility.

As far as decoupling goes, you’re right in that if risk aversion suddenly rises, it will be interesting to see which of these emerging markets is going to suffer from capital outflows. The lesson from the last financial crisis is that no one was spared after the collapse of Lehman Brothers. I don’t think that’s going to change here. Also, there is no economy which is going to be spared from the initial wave of capital inflows unless they’re completely closed economies. Even for a giant like China, reserve accumulation is very expensive and will really test the central bank in terms of managing inflation.

By: V. Umakanth

V. Umakanth — Sat, 16 Oct 2010 02:05:28 +0000

Nice post that provides a comprehensive overview of the currency situation. Although the scale of this crisis could likely be quite large, I wonder whether there are any similarities or lessons to be learned from the Asian financial crisis of the late 1990s that was triggered (at least in part) by currency fluctations and collapses. This currency war will also probably demonstrate which of the economies are truly decoupled, if at all, from the major markets.