China to open derivatives markets to foreigners

The State Administration of Foreign Exchange (SAFE) said on Monday, that foreign investors can now use derivatives such as forward contracts, swaps and options to manage currency risk on investments in China’s interbank bond market. There appears no easy arbitrage and that the interbank FX Future market prices futures efficiently, even in the absence of fully opened capital accounts.

China-US: Currency peace

A Foreign Ministry spokesman said on Feb 14th that China hopes that “relevant sides” will look on the RMB rate issue “in a right manner”. Devaluation RMB to boost exports has mostly been a thing of the past, during the early days of WTO membership. In general China’s exports have shown little elasticity to price. I also believe that RMB exchange rate should continue to be managed by the Central Bank and Trump is probably beginning to take a more real politik with China: the less is said, the better.

China needs to reform the financial system, and this should be done slowly

China’s foreign reserves slipped below the $3 trillion level in January, the lowest level since February 2011. In the background of a lacking economic confidence and rising trade protectionism throughout the world, the implications of the decline of China’s foreign reserves remains to be seen. It is a concern because the world has been used to China accumulating reserves. The main concern is not the level of reserves, but is the trend.

How can China react to Trump’s accuse of Exchange rate manipulation

The biggest challenge for China today lies in its capital account. Since the Renminbi began its downward slide in 2015, the incentive to reduce foreign debts and increase overseas assets has intensified.Under the accuse of Trump’s claim that China is an exchange rate manipulation country, China can choose to apply a floating exchange rate policy. However, this policy would cost China large amount to maintain currency stability. Under this circumstance, China should try to increase foreign investment in order to maintain international control.

Chinese capital control affects cross-border M&A activity

Accroding to Hexun.com, State Administration for Foreign Exchange (SAFE), fearing that cross-border M&A may be used by Chinese groups to move capital offshore, indicated that it will crack down on speculative acquisitions. From now on only “Strategic” acquisitions – that is those that have synergies with the buyer’s business at home – will be allowed. The closing of the Capital Account indicates, as I have often argued, that the Internationalization of the RMB is further away than generally assumed.

China economic outlook

Geraci and Prof Liu Baocheng from University of international business & economics were guests at CCTV Dialogue on 24, December, 2016. The talks mainly concerns Private capital outflow and challenges in manufacturing sector. Geraci belives the top concern for China is to stabilize the financial system. The west and other emerging markets have had experience of crisis, so China needs to be very careful. China should slow down reforms in the financial markets.

Fed’s rate rise: little impact on China

The rate hike operated by the Fed should not lead to particularly negative consequences for China because China is taking a step back in the reforms of the financial system and closing into itself. As soon as any government makes the choice to open the country’s capital account, there’s little that any central bank can do to defend its currency. China, therefore, does well to re-trench and disconnect from the world of international finance by adopting restrictive measures on the export of capital.

RMB internationalization is not going to happen in the medium term

FT on the internationalization of RMB. My view has always been that RMB internationalization is not going to happen in the medium term and that Chinese government itself does not really and should not want to do. Indeed, the use of RMB for international trade settlement has now gone down since IMF granted access to SDR. “Internationalization with Chinese Characteristics”. It is in the interest of china NOT to move too fast with this.

Geraci dampens enthusiasm on financial reforms

Geraci and Prof He Weiwen from Renming University were guests at CCTV Dialogue on 25, November, 2016. They discussed three main topics: Shanghai free trade zone, RMB internationalization and Trump’s impact on china. For Shanghai free trade zone, it is impossible to be successful with no borders control. In terms of RMB internationalization, RMB entering SDR is a recognition that China is moving but it has no practical implication. Trump will increase tariffs, but it’s impact on Chinese exporters may not be as large as originally anticipated.

RMB and SDR explained

Geraci minimises the effect of RMB entering the SDR basket. In this weekly podcast, he points out the that total value of SDR is only around US$ 300bn and that the basket itself has never been used, except in rare occasion. The inclusion of the RMB in the SDR basker is only a face-saving exercices, dear to the Chinese, but of very little practical importance in the grand scheme of international finance