Curb Speculative Trading Of Hot Money And Maintain RMB Exchange Rate Stability

In May 1, 2014, the central parity of RMB against the US dollar dropped to 6.2670, which is the 3 consecutive month of decline in the past 3 months, or more than 30%.

Since the beginning of 2013, the renminbi has appreciated strongly for 41 consecutive new highs. In December 31, 2013, the exchange rate of RMB against the US dollar was 1 yuan to 6.0969 yuan.

Why has RMB changed from appreciation to decline? < /p >

< p > < strong > Big Mac index < /strong > /p >

< p > < strong > < a href= > //www.sjfzxm.com/news/index_c.asp > Bretton Woods system < /a > /strong > /p >

< p > what is the exchange rate? Or what factors determine the exchange rate between domestic currency and foreign currency? In 1992, Cassell, a Swedish economist, put forward the theory of purchasing power parity (PPP), which holds that the exchange rate between the two countries is equal to the general price level of the two countries.

For example, the price of a commodity in the United States is 10 dollars, which is 80 dollars in China, and the exchange rate of US dollar to RMB is 81.

But the price level of a country is not a complete factor in determining the exchange rate.

The Big Mac hamburgers produced by McDonald's fast food restaurants are sold in many countries. Due to the same raw materials and specifications, the price of the same big Mac in different countries should be consistent theoretically.

In 1986, the Economist magazine conducted a survey of the sale price of Big Mac hamburgers around the world, and found that the price of Big Mac in the world was very different.

In 2006, the world's most expensive Big Mac was priced at 5.21 dollars in Switzerland, the cheapest in China and 1.31 dollars in the US, and 3.1 dollars in the United States.

The magazine publishes a new Big Mac index every year as a reference index for the trend of international exchange rate.

In the era of the global economy, the influencing factors of exchange rate have been diversified and complicated. Apart from the price level of a country, the balance of payments, the level of interest rates of domestic funds, the speed of economic growth, the fiscal and monetary policies, and the international speculative capital and trade barriers will affect the exchange rate of a country.

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< p > domestic currency has fixed exchange rate and floating exchange rate for foreign currencies.

The Bretton Woods system based on a fixed exchange rate after the second world war has determined the basic pattern of the world's international currency.

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In P, July 1, 1944, the international monetary and financial conference was held in Bretton Woods, New Hampshire Town, with 44 countries participating.

The conference adopted the International Monetary Fund Agreement and the international bank for reconstruction and development (IBRD) agreement, collectively known as the Bretton Woods Agreement.

This epoch-making international conference has established the postwar international financial Bretton Woods system. There are three main aspects: 1., the establishment of the International Monetary Fund (IMF) to supervise and manage the exchange rates of various countries and to provide financial support for international balance of payments; and 2. dollars to be linked to gold.

The official price is 35 US dollars =1 ounces of gold; the 3. fixed exchange rate system: the currencies of the member countries are linked to the US dollar, and the governments of each member state promise to ensure that the fluctuation rate of their currencies against the US dollar is 1%.

The Bretton Woods system successfully established the relatively stable international monetary pattern in the post-war world, and promoted the prosperity and development of the world economy.

However, with the acceleration of the globalization process of the world economy, the defects of the inner mechanism of the Bretton Woods system are becoming increasingly apparent and aggravated, that is, the so-called Triffin Dilemma. To meet the needs of the economic development of all countries in the world, the supply of the US dollar must continue to increase.

In 1971, the US government abandoned the fixed link between us dollar and gold and implemented free floating.

Subsequently, the European Economic Community, Japan, Canada and other countries also announced the implementation of the floating exchange rate system, no longer bear the obligation to maintain the fixed exchange rate of the dollar.

The Bretton Woods system collapsed.

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< p > strong > RMB value is not the higher the better, < /strong > /p >

< p > July 21, 2005, China implemented the "a href=" //www.sjfzxm.com/news/index_c.asp > exchange rate < /a > reform: China announced that the exchange rate system should be adjusted from a single peg to the US dollar to a basket of currencies.

In March 17, 2014, the people's Bank of China announced that the fluctuation of the daily RMB to us dollar exchange rate would be expanded from plus or minus 1% to plus or minus 2%.

Under the premise of adhering to the floating exchange rate of Basket Currencies, a direct motive of the central bank to expand the volatility of the RMB exchange rate is to try to combat the cross-border arbitrage of "hot money" that has been rampant in recent years by enhancing the two-way fluctuation of the RMB exchange rate.

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< p > the so-called "hot money" is an international speculative fund for short-term cross-border flows. Such funds do not have the background of real international trade or capital investment, and the main driving force is speculative arbitrage.

Like most emerging countries, China's financial market lacks depth and flexibility, and the impact of short term international capital will lead to large fluctuations in the RMB exchange rate.

So why did a lot of hot money pour into China since 2013? < /p >

< p > monetary policy of the developed countries.

In recent years, the world economy has experienced the subprime mortgage crisis, the global financial crisis and the European sovereign debt crisis.

In order to promote economic recovery, the major developed countries in the world have chosen expansionary monetary policy: 1. ultra low interest rate policy.

After the US subprime crisis broke out in 2007, the Federal Reserve cut interest rates for the 10 time in a row, and the benchmark interest rate dropped from 5.25% to 0-0.25%.

In 2008, the European Central Bank lowered its benchmark interest rate from 4.25% to 0.75%.

2. quantitative easing policy.

Quantitative easing policy refers to the central bank's liquidity injection to the market by expanding its balance sheet when the benchmark interest rate approaches zero.

From 2009 to 2012, the Fed implemented three rounds of quantitative easing policy, buying nearly $3 trillion of mortgage backed securities and long-term treasury bonds.

The Bank of England also implemented three rounds of quantitative easing in 2009, 2011 and 2012, injecting 375 billion pounds into the market.

3. twist operation.

In September 2011, the Federal Reserve announced a reversal operation, buying $600 billion to 6 to 30 year treasury bonds in the open market, and selling the same amount of short-term treasury bonds for 3 years.

The Fed's "short selling long" reverse operation aims at lowering long-term interest rates.

The continuous expansion of monetary policy in developed countries, while overcoming the financial crisis and promoting economic recovery, has also brought about global flooding. It not only stimulated inflation, but also provided liquidity support to international speculative capital.

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< p > < a href= > //www.sjfzxm.com/news/index_c.asp > RMB > /a > expectation of continued appreciation.

If the "hot money" $100 flows into China at the time of A, it will be converted into RMB at the prevailing exchange rate; at B point, because the RMB has appreciated, it can be converted into US dollars for us $101.

$100 flows from A to "101 dollars" from B, which is speculative arbitrage.

Therefore, the appreciation of the renminbi is often causal and interacted with short-term international capital flows.

The appreciation of the renminbi is expected to result in short-term international capital inflows, while short-term international capital inflows accelerate the appreciation of the RMB exchange rate.

Once the appreciation of RMB reaches its peak or the trend of RMB exchange rate reverses, large scale capital flight will result in a significant impact on China's economy.

This is one of them.

Second, compared with the low interest rate policy of the major developed countries in the world, China's interest rates remain relatively high.

The Shanghai interbank offered rate (SHIBOR) is 5 percentage points higher than that of the London Interbank Offered Rate (LIBOR) in the same period.

So spreads are also a powerful driving force for speculative trading of hot money.

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< p > American economist Krugman put forward the famous theory of "three element paradox" at the end of the last century: the independence of monetary policy, the free flow of capital and the fixed exchange rate three forms an equilateral triangle, and the combination of any two sides must be based on the abandonment of the opposite side.

China is a big country economy. We must maintain an independent monetary policy. We can not easily reduce interest rates to curb the inflow of arbitrage funds.

Therefore, a viable option for the central bank is to change the unilateral appreciation of the renminbi through intervention in the market.

If the RMB exchange rate fluctuates around the equilibrium level, it will increase the risk cost of arbitrage pactions, and achieve the purpose of curbing speculative trading of "hot money" and maintaining the stability of the RMB exchange rate.

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