Title: Chinese Monetary Policy
1Chinese Monetary Policy exchange rate
2Content
- Important events in exchange rate management
- The art of allocating wealth
- Credit slaverize
- Fact rich becomes richer
3two Key Milestones
- 1994 Jan. 1st
- integrate exchange rate market, consolidate and
fix the exchange rate to 1 8.7 USD - 2005 July 21st
- Introduce a basket of currencies as for CNY
exchange rate for references, appreciated 2 to
8.11 on that day.
41994 PolicyWhat the government did
- price depending on demand supply from
government assigned bank, ? but actually it is a
pegged system 18.7 USD CNY, with a floating
allowance of 0.3 a day - USD is the only reference currency.
- Consolidated the two market with a membership
scheme, - All trade and settlement are done by
inter-banking quote system. - Paying a premium on the supply of foreign
currency in private sector. - A lot government intervention.
52005 policyWhat the government did
- RMB appreciated 2 to 1 8.11 USD on that very
day - Added a basket of currencies as Reference
currencies, they are USD, HKD, JPY, EUR, GBP,
MYR - Golden bull for Chinese stock market until 2007
- Release the inflation pressure from huge
international reserve
6Chinese Exchange rate policy concerns
- Americans insists that China is manipulating
exchange rate to achieve price advantage to
compete with American firms in manufacturing
industry - The Chinese policy makers view exchange rate
policy as a means to achieve certain economical
goals - To avoid failure like Thailand in 1997,
- To attract foreign investment fund
7Monetary Policythe art of allocating
wealth???????
- We all know about the three basic feature of
money, medium of exchange, unit of account, and
store of value. But in real world, it is more
than that. - There are several hidden identity of money
- We all learned about the time value of money,
there are two key elements Time and Price, or
interest rate. - Different price of money represented different
future expectation of certain money - ? This indicates that the money today in
different persons possession does not
necessarily worth the same to each other.
8Monetary Policythe art of allocating
wealth???????
- We all learned about the time value of money,
there are two key elements Time and Price, or
interest rate. - Different price of money represented different
future expectation of certain money - ? This indicates that the money today in
different persons possession does not
necessarily worth the same to each other.
9Monetary Policythe art of allocating
wealth???????
- Government can make benchmark prices for money
through monetary policy (by setting different
interest rate, exchange rate) - ? Government can control the future wealth of a
society. - However, this is not the most powerful tool.
- The most powerful tool is controlling the money
supply. M1, M2, M2 whatever - strategy
- Low inflation to encourage people to work hard
- High inflation to lick up the wealth the people
created.
10Monetary Policytwo-person economy
- But government can not just do that because there
will be revolution fighting for this extreme
unfairness. - So they change the name, by using credit.
- Lets consider a two person economy
- A plants for food to survive and provide all raw
material, and B is in charge of building
infrastructure and other production for both of
them.
11Monetary Policytwo-person economy
- Think about A getting a mortgage for a house in
economically good time from B. - Pay only 20 of the total price, and borrow the
rest under a Monetary loose phase. Borrowing to
stimulate economy. - In economics terms, it is bringing the money from
the future to the present. It is increasing Money
Supply, but the reality is their wealth does not
worth the same, or, their wealth is leveraged - At the same time, people will pay for the price
of borrowing, say 5 of principal a year.
12Monetary Policytwo-person economy
- Two years later, both A and B find that the price
are inflated, as MS grows artificially by them.
So B proposes to limit the credit to fight
inflation, by doing so, interest rate has to go
up, because supply of fund goes down, price of
fund goes up. - But A borrowed money before, so his price of fund
went up as well. There is no influence on B
because he does not need to borrow. - ? Rich people are richer and richer.
13Monetary PolicyCredit Slaverize????
- Summary of two person model for credit
slaverizing three steps - 1. Grow the fleece
- Loosen credit limit during expansionary phase
- ? Bring future money to present artificially
increase money supply without creating anxiety - 2. Hunting the sheep
- Tighten credit limit during contractionary phase
- ? But it just stops bringing money from future to
the present, it does not suck up the money
brought before - 3. Cutting the fleece
- Force the poor into bankrupt and take over
valuable assets - increase debt burden of them by change the
interest rate because they have to survive by
relying on debt. - Benefit from lending money, as the first owner of
the newly created money
14Monetary Policythe rich gets richer
- In China, the rich people are becoming richer and
richer. - According to Huren.net, in 2009, there are
825,000 people who has more than ?10,000,000
worth of asset in China including 51,000 people
with assets more than ?100,000,000. - In 2010, there are respectively 875,000 and 55,000
15Monetary Policy the rich gets richer
- Combined wealth of top 10 richest year by year
- Source hurun.net
Year Total Growth
2005 94.7B
2006 154.9B 63
2007 543.0B 250
2008 272.5B - 49
2009 308.0B 13
2010 405.0B 31
16Monetary Policy the rich gets richer
- GDP per Capita in USD vs. Rich people wealth
growth - Source IMF. 2010 World Economic Outlook
Year Total Growth
2005 4102.495
2006 4748.661 15.75
2007 5553.39 16.95
2008 6187.707 11.42
2009 6778.091 9.54
2010 7517.717 10.91
Year Total Growth
2005 94.7B
2006 154.9B 63
2007 543.0B 250
2008 272.5B - 49
2009 308.0B 13
2010 405.0B 31
17Summary
- There are two important Exchange rate policy
adjustments 1994 and 2005 - Mundels inconsistent trinity indicates that
Chinese government is trying to allow free of
capital flow in China - Monetary policy is a useful tool to allocate the
wealth of a society by using money as the
liability of the whole society. Or credit
slaverize - The rich gets richer and richer as a result.