We have seen thousands of reports out there, critisizing China as the manipulator of its yuan, how she actually pin the yuan down in an effort to support its exporters.
But in this post, my focus is not going to be on its manipulation of its currency.
Rather it will be directly opposite, I will be focusing on the ironic fact that it is not focusing on its interest rates.
Recently, as I was reading my Economics notes (I did not take Econs in my Junior College so I thought it is instrumental for me to do some reading-up before I enter Business at NTU later in August). So I saw this note, that small countries like Singapore focus on exchange rates whilst the big countries like China should focus on their interest rates.
However, paradoxically, China is now palpably focussing on its yuan. That is very ironic.
The reason why Singapore should focus on exchange rate is because it does not have much control on the restriction of the capital flows. If it were to focus on interest rates, "hot money" will flow in and out rapidly and this will destabilise the exchange rate very easily. This is obviously very dangerous for a small country and can eventually lead to the demise of the entire Singapore economy.
Nonetheless, I saw this note on marketwatch.
Bank of America Merrill Lynch analysts said Zhu's comments may be laying the ground work for adopting a currency platform similar to the one in place in Singapore, which would involve benchmarking the yuan to a basket of currencies.
This bunch of analysts completely understood my point about the fact that China is actually emulating Singapore's monetary policy. That is to benchmark the currency against a basket of currencies.
Of course we are not talking about any random basket of currencies, these basket of currencies we are referring to are actually the currencies of our key trade partners and the countries we export to and import from.
We attribute various weight factors to the different countries so that we can adjust our currency appropriately.
But China is different, it is brobdingnagian in size and it should be doing what the little red dot is doing. In fact, it should let its currency float with the market according to Supply and Demand and instead, control its interest rates.
Right now, China is pinning down its interest rates and at the same time pinning down its currency. This is not supposed to happen, you should only control one factor, not both. No wonder it is being critisized by many countries.
With a low interest rate, foreigners will be less likely to be attracted to buy up the debts of China and thus the supply of yuan remain high, thus the value of yuan drops, which is what China is exactly plotting, to support its exporters of course.
Yeah, so I thought China is doing the wrong thing and should seriously let its currency float with the market. Too much control and manipulation will only lead to the rise of asset bubble, it's insidious in nature.
One day, China will pay in the form of devastating trade deficit!
Credits -marketwatch, -wikimedia, -whoisjason, -fotolia
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