2005-08-12

The RMB Basket Composition


The basket content for the new RMB peg is revealed, and the principles and methodology for the choice and weight of the currencies, see PBC's official script for the speech at its website (English version for reference). I believe there are a few reasons for this move.

  • To avoid overzealous human error and force adherence to a mechanical peg procedure, and also to convince the mass it is not an arbitrary 'black box'
  • To facilitate the forward hedging operators
  • To convince businesses to switch contract into non-USD currencies

The estimated currency weights, according to Stephen Jen of Morgan Stanley, are illustrated in the this chart.

  • HKD is counted into the USD weight
  • It is unclear whether TWD is included, because PBC does not convert TWD into RMB directly and Jen counted it into USD weight as well because most of the transactions are denominated in USD
  • FDI and Trade (goods and service) are included in the above estimate
  • There are other currencies (e.g. THB), basically all those with trade value above $5bn will be in the basket

The current account is the basis for determining the weights (detailed definition here)

  1. Tangible goods trade (import, export)
  2. Service trade (transportation, tourism, communication, construction, insurance, IT, patent license fees, consulting. advertising, entertainment and other business and government services)
  3. FDI and related dividends (investment and salary incomes and expenses), e.g., P&G China, and also Lenovo/CNOOC's investment overseas)
  4. Current transfer (e.g. private fund movement, overseas Chinese sending to relatives)

As for how the basket peg is operated daily, not much was said. But it is expected to be consistent with my previous post -- also supported by John Williamson's paper (right click to download).

A particular point worth noting is that each currency has its own gap and it has been observed that the gaps for EUR and JPY are probably set at 1% (0.5% each way)

Ito of REITI in Japan said something in line with my previous posts. I did some calculation testing the basket content and the concluded USD has an effective weight of around 60-80% (note KRW, SGD, etc all has some USD component), or that PBC was intervening on USD while allowing EUR and JPY to drift in a much larger gap, effectively trying to influence the international cross-rates as well. Ito said, "For example, movements in the yuan-dollar rate between July 22 and July 28 can be explained to a certain extent by changes in the yen-dollar and the euro-dollar rate. Even when both the yen and euro moved in the same direction against the dollar during this period, the yuan did not fluctuate as much against the dollar as the other two currencies. Thus it can be inferred that the weights of the yen and the euro in the currency basket are quite modest. "

  • "Theoretically... it would be possible for the central rate to gradually rise, though only by a bit each day. With strong buying pressure, the yuan would reach the upper limit each day (a daily appreciation of 0.3%)...6% over one month (around 20 business days)...However, on July 26, the People's Bank of China said it was incorrect to consider this 2% revaluation as the "first step in reform," or to assume that the revaluation range would gradually be expanded. In this case, the above example of a gradual rise in the value of the yuan will not happen...if the yuan-dollar rate is used as the central rate for the following day, reference to a currency basket would be basically meaningless. If the basket were used seriously, officials would probably steer the yuan-dollar rate so that the closing rate would be close to the reference currency basket. This was the most opaque part of the central bank announcement.
  • Moving to a basket system, however, does not necessarily mean that all currencies included in the basket must be used for intervention and foreign exchange reserves. Intervention to maintain the yuan's value against the basket can be done with yen, euro, or dollars. If one assumes that the exchange rates between the yen, dollar, and euro are not affected much by Chinese intervention, whichever currency China uses for intervention, the results will be the same due to arbitrage between the three currencies.
  • the composition of foreign exchange reserves is determined to ensure liquidity and from an asset management perspective. This means the currencies in which foreign exchange reserves are held are not necessarily the same as the basket currencies. Thus, adoption of a currency basket system need not imply a shift in China's foreign reserve holdings or a sell-off of the U.S. government bonds it holds."

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Here is an excerpt from Economist:

China's new currency basket is broader than most economists had expected
ON AUGUST 10th, three weeks after China abandoned its decade-old peg to the dollar and moved to a managed float of the yuan against a basket of currencies, Zhou Xiaochuan, the governor of the People's Bank of China, revealed which currencies the basket contains. This came as a surprise. Singapore, which has operated a similar system since the 1980s, has never taken such a step. However, China's openness has limits: it is keeping to itself the weights attached to each currency.
Mr Zhou said that the dollar, the yen, the euro and the South Korean won have the biggest weights, but the basket also includes the currencies of Singapore, Britain, Malaysia, Russia, Australia, Thailand and Canada. The Hong Kong and Taiwanese dollars are conspicuously absent. Even so, the basket is much broader than expected. Most analysts had bet on only the dollar, the yen and the euro.
The choice of currencies (and hence presumably the weights), said Mr Zhou, depended not only on the pattern of China's trade but also on the sources of its foreign direct investment (FDI) and the currency composition of its debt. Stephen Jen, an economist at Morgan Stanley, has had a stab at estimating the weights. Using a weighted average of China's trade and FDI, he guesses that the dollar has a weight of 43%, the yen 18% and the euro 14%. This incorporates a higher dollar weight to reflect the importance of Hong Kong and Taiwan. The Hong Kong dollar is pegged to the greenbacks and all transactions between China and Taiwan are in dollars.
It is still unclear how the system will actually operate. In theory, if the dollar falls against the other currencies, the People's Bank of China should let the yuan rise against the dollar in order to hold the overall value of the basket steady. But this is at the discretion of the central bank. However, if this regime had been introduced in January, then as the dollar rose against the other currencies the yuan would have fallen against the dollar—which would hardly have pleased America's Congress.
China also announced this week a further liberalisation of foreign-exchange trading, allowing non-banks to trade in the spot market and more banks to conduct forward trading. Currency swaps will also be introduced into the onshore market.
The reforms are aimed at making the domestic foreign-exchange market more liquid. That would allow banks and firms to hedge risks and so help them to handle uncertainty following the scrapping of the yuan's dollar peg. The central bank claims the measures will give the market a bigger role in setting the exchange rate. However, thanks to strict capital controls, the bank will retain its tight grip on the yuan.

---

Zhou's speech:

"作为人民币汇率调节的一个参考,在篮子货币的选取以及权重的确定时主要遵循的基本原则是:考虑我国国际收支经常项目的主要交易国家、地区及其货币。大家知道,经常项目包括四项内容:商品贸易、服务贸易、收益(利息、分红等)及经常转移(华侨汇款等)。用通俗一点的话来讲,是综合考虑在我国对外贸易、外债(付息)、外商直接投资(分红)等外经贸活动中占较大比重的主要国家、地区的货币,组成一个货币篮子,并分别赋予其在篮子中相应的权重。
——以着重考虑商品和服务贸易的权重作为篮子货币选取及权重确定的基础。
经常项目收支是我国国际收支平衡的基础环节,而商品和服务贸易收支又构成了经常项目收支的绝大部分。从我国现阶段的国情看,商品和服务贸易是经常项目的主体。因此,篮子货币的确定也是以对外贸易权重为主的。美国、欧元区、日本、韩国等目前是我国最主要的贸易伙伴,相应地,美元、欧元、日元、韩元等也自然会成为主要的篮子货币。此外,新加坡、英国、马来西亚、俄罗斯、澳大利亚、泰国、加拿大等国家与我国的贸易比重也较大,这些国家的货币对我国的人民币汇率也是很重要的。一般而言,与我国的年双边贸易额超过100亿美元,在权重中是不可忽略的,50亿美元以上也是不算小的。从支付结算的角度看,尽管目前仍有一些国家或地区在与我国的贸易中较多、较习惯采用美元结算,但这种情况正逐渐发生变化,选用其本币进行结算的会渐渐多起来,我国也要适应和鼓励这一趋势。由于篮子货币的国家和地区占我国对外贸易总量的比重相当高,针对一篮子货币的人民币汇率将比针对美元的人民币汇率能够更好地反映人民币的价值变化和我国面临的总体贸易条件,对实现商品和服务贸易基本平衡有重要的参考意义。
——适当考虑外债来源的币种结构。
随着我国对外开放程度的不断提高,外债金额越来越大,去年末,中国的外债余额折合为2286亿美元,外债来源呈现多样化。由于在多数情况下,外债需用人民币兑换为具体的计价货币进行还本付息,具体的计价货币会在外汇市场上产生明显的需求,成为影响人民币汇率的一个因素。因此,篮子货币权重的确定也要适当考虑我国对外负债的币种结构。
——适当考虑外商直接投资的因素。
近年来外商直接投资增长较快,在我国对外经济关系中的地位日益提高。我国引进外商直接投资已有相当规模,目前,累计使用外商直接投资达5600多亿美元。这些投资中有很多是采用投资来源国自身的货币,而且将来通过分红取得投资收益时也要兑换为相应的外币汇出。因此,在篮子货币中要考虑外商直接投资的影响。
——适当考虑经常项目中一些无偿转移类项目的收支。
虽然这类项目收支所占比重相对小一些,但其币种构成也会对各篮子货币的权重产生一定影响。
总之,这次人民币汇率形成机制改革中所包含的参考一篮子货币进行调节的内容,适应了我国对外经贸关系多元化和国际经济金融体系多元化发展趋势的需要。参考一篮子货币不是盯住一篮子货币。盯住一篮子货币,是机械地按篮子货币汇率指数的变化来调整人民币对美元汇率,以实现名义有效汇率不变。而我国实行的是以市场供求为基础、参考一篮子货币进行调节、有管理的浮动汇率制度,与单一盯住美元的汇率制度相比,可以更全面地反映人民币对主要货币的变化,有利于较好地应对美元不稳定所带来的影响,降低人民币多边汇率的波动,维护我国对外经贸环境总体上的稳定,从而促进国际收支基本平衡和国民经济持续、协调、健康、较快发展。"

2 comments:

Sun Bin said...

Stephen Jen of MS confirmed with my initial calculation that the implied weight of USD is much higher (he put it at over 85%) - noting that there is probably a biase in the gap monitoring of different currencies.

He also pointed out (as in the Williamson paper) that the basket weight and the reserve weight are not neccessarily aligned.

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