2005-07-23

7/22 RMB closing rate: asymmetric intervention?

PBC announced on 7/22/19:21

USD/RMB=8.1111
EUR/RMB=10.0141
100YEN/RMB=7.3059
HKD/RMB=1.0478

It also said this is the closing price of the day trade, which seems to be a bit different from my previous interpretation of basket peg recalculation. PBC seems to be monitoring the basket peg in real time, and announce the closing price at the evening, which is some number (based on market trading) within the gap and the recalibrated central parity (in real time)
-- (But more data points needed to understand what they are trying to do)

However, something strange in these numbers
The implied cross XR are:
EUR/USD= 1.2346
USD/YEN=111.006
USD/HKD=7.7411

Market value at yahoo (10am GMT) shows:
EUR/USD= 1.218
USD/YEN=110.95
USD/HKD=7.771

Looks normal, except for the EUR, where the cross rate discrepancy seems larger than normal gap in transaction cost (and wider than 0.3%).

Maybe evidence of asymmetric intervention in USD vs EUR. Wide enough gap for arbitrage. Hard to arbitrage in a capital controlled market. But this may be practiced. If I am a MNC CFO, I have cash in EUR and USD and I need to pay my supplier in RMB, I will definitely use my EUR account to pay for the bill, as it converts to more RMB. Furthermore, if I can convert my USD into EUR with a ask/bid spread less than 2%, I would even convert my USD into EUR before going to PBC.

Now why does PBC allow for such discrepancy?
1) A mistake (looks like the EUR number is from July 20), or a deliberate act to confuse speculators
2) They want more EUR. The current EUR holding falls short of the target weight in their basket. Therefore, instead of buying EUR with their USD in the open market, PBC decided to use the RMB trading board to guide a drift in EUR. By creating a better price for EUR/RMB (effectively depreciated RMB vs EUR), they hope to attract more EUR into their currency board.
  • We can also understand this from another angle. If the basket is 70% USD 30% EUR, they want to sell 8,11RMB for USD0.70 and EUR0.30/1.21. On July 22, more people comes in with USD than EUR (compared to the target mix), so they let EUR/RMB drift away from the target central parity for more than 0.3%, or we could say they recalculated the central parity and allowed it to drift there. Nevertheless, this is an unstable/transitional position as the implied USD/EUR rate is too far away from that in international market.

8 comments:

Navin said...

Sun - bin,

This whole thing looks very confusing. Hope after a 3 or 4 days of trading it will all be clear.

I wonder if they themselves got it confused/botched and are making it up now.

now is it going to be pegged at 8.111 ?

Also, my main Q for u is..

this being a neglible change, this has a risk of not changing the trading pattern between China and US ?

If yes, is this a bad news for trade deficit ? ( a straight 2% increase)

Not sure if Goldman Sachs study that 2% revalue will affect 2% exports.. that looks less unlikely ?

Sun Bin said...

Navin,

it is quite confusing at this point of time. we may have to wait till there is significant change between USD/EUR to verify our different theories on how it operates, maybe more than 3-4 days, even 3-4 weeks may not gather us enough useful data points.
but that is their purpose. i still think a couple singaporean consultants are sitting in the PBC office for the next few months.

8.111 will fluctate or drift. if USD goes above 8.11 then EUR will go under 9.81(or 10.01, i am still a bit confused about what the central parity for EUR is)

i am not sure about the trade impact, i guess the export change will be less than 2%. but one will never be able to find out for sure. Because if it is growing at 25-30% if there was no reval, now if we got growth # of 26%, what could we conclude? apparently nothing. there is no control experiment to compare the results.

Anonymous said...

sun-bin -- nice post, and interesting idea that china wants to build up its euro reserves by buying more euros spot and fewer dollars spot. that avoids the need to intervene in $ and then convert $ to euro in the open market. Not totally implausible.

brad setser

Sun Bin said...

According to BOC's website, the discrepancy has narrowed today

middle price (=?"central parity"")
USD:810.97
JPY:7.2421
EUR:988.22
HKD:104.25

Sun Bin said...

Brad,

Thanks for your note.

I am still not sure if that is true though. But if it is, the new system is influencing the EUR/USD XR though this mechanism. (although the fact that the shifting of the peg away from USD is already taken as shifting demand, hencing driving up EUR valuation)

Sun Bin said...

opening price Jul26 (closing on Jul25) according PBC's website

USD 8.1097
HKD 1.0424
JPY 7.2550
EUR 9.8822

Sun Bin said...

finally find the PBC web-page of the 'closing rate'

July 27
1美元对人民币8.1128元,
1欧元对人民币9.7431元,
100日元对人民币为7.1954元,
1港元对人民币1.0423元。

July 26
1美元对人民币8.1099元,
1欧元对人民币9.7709元,
100日元对人民币为7.2496元,
1港元对人民币1.0425元。

July 25
1美元对人民币8.1097元,
1欧元对人民币9.8822元,
100日元对人民币为7.2421元,
1港元对人民币1.0425元。

Sun Bin said...

according to sina.com

On Jul/27 PBC intervened one minute before closing, so that closing price for USD dropped from 8.1091 to 8.1128.
by 0.04%, even though it is still within the gap. or maybe not (?)

also,
NDF spread is narrowing
1-yr = 7.76
3-month = 8.04

I will bet for 3-month NDF to stay at 8.11