Problems That Must Be Squarely Faced In The Process Of Exchange Rate Marketization

Since we actually witnessed a historic breakthrough in the RMB this year, we have joined the SDR basket for the first time as an emerging economy.

So, after joining, what are we going to face next?

In fact, there was a Q&A on the day of the SDR accession conference. The ninth question was very clear. The next step is to achieve the full liberalization of the RMB interest rate and to move towards a more market-oriented exchange rate.

Well, the problem is coming.

According to our domestic common understanding, if you are a market-oriented exchange rate, there must be appreciation and depreciation.

If there is no appreciation, no one will say anything.

But if devaluation, someone will come out and say "currency war".

I have seen so many media voices.

Therefore, the first issue I will discuss today is the question of currency war.

Obviously, it does not mean that any depreciation of a currency can be called it, it should be called a currency war, otherwise there will be no floating exchange rate.

Therefore, more strictly speaking, the "currency war" is first of all an empirical question. In the end, we must depreciate it so as to call it "beggar thy neighbour".

If we are the same as everyone else, will we not be able to talk about war or not?

I choose the G20 economy plus a few emerging economies that I am concerned about, such as New Zealand, China, Taiwan and Thailand. A total of 20 economies choose their exchange rate. After the crisis, especially after 2007, the lowest point of exchange rate is relative to its high point. This high point may occur in 2007 and before, and may also be in 2007 and beyond, for example, the highest point of the RMB exchange rate is after 2007.

The largest exchange rate between the local currency and the US dollar has been derogated. The largest Argentina has depreciated 30% more in the first two days, which has been very interesting and has already been derogated from 844%.

But Turkey is also very strong. If the average value is simply calculated, these economies will total 122%.

I think that more than 100% of the devaluation rate is considered to be an accident. If it is taken away, it will be either domestic political turmoil or international sanctions.

These normal economies have an average depreciation rate of 45% against the US dollar.

Then, inside, look at several developed economies, and the US has no exchange rate because it itself is an international standard currency. We have chosen the ICE US dollar index, which is the largest US dollar relative to the pre crisis high point, and the largest depreciation rate has reached 39%.

Take a look at the euro, the depreciation rate of 40%, we calculate the average of 45%.

In this round of crisis, the main currencies depreciated relative to the previous high points, and the renminbi was the only one digit depreciation against the US dollar.

From the perspective of economic impact, what is the biggest devaluation? Japan has depreciated 47%.

Because the bigger the effective exchange rate is, the higher it is, and Brazil also derogate from 45%.

The order of my platoon, according to the time when the high point appears, the more backward the process is, the later it starts.

If we calculate a simple average, we will avert 25% on average.

Similarly, the average depreciation rate is 23% according to the figure of several accident economies.

The depreciation rate of the United States has been 30%, and the depreciation rate of the euro area is around 29%.

For example, the US derogated earlier, and the eurozone depreciated later, so the image likened a devaluation process to a flowing place.

This is experience.

The real exchange rate of China's RMB only depreciated by 1%.

What I have just looked at is data from experience. In the international arena, like international wars, we all say that preferential treatment of prisoners of war is not always there.

So, what kind of war is not a crime must also have an international norm.

When Andouble campaigned in 2012, he threatened to devalue the Japanese yen. Japan said that now I am going to let you not let anyone else quit, so you have to set a rule.

At the beginning of 2013, a G7 finance ministers and central bank governor held a meeting in Britain to determine what I call "the three principles of currency war". As long as we follow the three devaluation, there is no problem.

First, if a market determines the exchange rate, and maintain close communication with the market.

Therefore, the premise is that if you set the market, if you do not set the market, it is man-made, certainly will not do anything bad for you, it may be defined as a currency war.

Second, if we aim at domestic targets and use domestic tools, there will be no problem in devaluing the local currency.

So why is the depreciation of the yen so big? Why is there no problem? Because with QE, I did not use any means, nor did I intervene in the foreign exchange market.

Third, we can not set the target of exchange rate.

I can't say how much I want to depreciate. Before Andouble's election, he called the yen down to 120 every day, when the yen was 70.

Later, when Andouble came to power, Andouble said that we should continue to do the work of volume, and not to say how much Japan should depreciate.

Therefore, in line with these three principles, it is not a currency war.

Combined with the above analysis, if the depreciation rate of bilateral exchange rate is static, no more than 40%. If the depreciation rate of a basket of currencies is not more than 30%, if you are a market determined exchange rate, if the exchange rate changes caused by the adjustment of domestic policies, if you do not set the target area of exchange rate, any change of your exchange rate is not monetary policy.

Let us look at the second issue again, namely, the issue of devaluation and internationalization.

Since the renminbi will be marketization in the future, marketization will appreciate and depreciate.

Many people say that we have seen that the process of RMB internationalization is advancing rapidly. In fact, it is in the process of RMB appreciation. The appreciation of the renminbi has been appreciated by everyone, because it is becoming more and more valuable.

So we concluded that only one currency appreciation can promote internationalization, and how to internationalize the depreciation? In fact, this is wrong.

The reason why it is wrong is actually because internationalization is not only about internationalization of trade, but also refers to the internationalization of investors as investors holding this currency, which is regarded as an asset.

If it is a liability, will depreciation be meaningless? So, over the past five years, many companies have been issuing US dollar bonds on a large scale? Why? Cheap! Because the US dollar has been constantly derogating. Nothing has been done in the past five years.

Therefore, in this sense, when the RMB enters the devaluation cycle, our capital account output can go faster. In fact, the RMB trade settlement now accounts for 1/3 of China's foreign trade ratio, which is the limit that Japanese yen and German Mark once reached.

You can't walk away from this aspect.

Therefore, the next step should be focused on capital outlay. Especially after our country put forward "one belt and one road", can the "one belt and one way" count on US dollar loan? If it only uses US dollar loan, I now reserve four trillion, and then look back and become one trillion.

However, if we promise to give loans to the renminbi, we will be able to make promises.

As you can remember, when the yen gave loans to infrastructure in China, the interest rate was very low, and it seemed to be very cost-effective, but at the end of the day, these projects were all in deficit.

Why? After the appreciation of the yen, the cost of RMB repayments increased sharply.

Therefore, in this sense, the "one belt and one road" proposal, I think the next stage actually means that the emphasis of RMB internationalization will be shifted from trade output to capital export.

As the internationalization of RMB, we will focus on Internationalization in the next stage.

If you want to let more stocks of RMB go abroad, the renminbi will come back. If you say internationalization, it seems that you are talking about something wrong.

If you are not going to let it out now, how can we increase the stock of foreign currency? How can it be internationalized?

But now the pressure of offshore devaluation is too great to let it go out casually. What is the only way to do it? The only thing is to make it market oriented. When offshore and offshore are consistent, capital controls can be released, and more people will be able to issue panda debt, and the internationalization level will be further improved.

From five years later to increase the weight of SDR, this time we accounted for more than SDR10% of weight, most of which earned by trade, not earned by finance.

Therefore, if the RMB internationalization should take up the weight of SDR in the next five year plan, the proportion of RMB trade settlement has already taken up the level of yen and Mark in Germany, and the next step will be finance.

In finance, only by allowing more people to go out, can there be RMB trading overseas. The more pactions he has, the more weight he will get in the next five years' planning.

Then, what is more interesting is that if we are allowed to trade, not only to go out, but also to float the exchange rate, you will not move. How can there be a deal? I believe many people have the experience of stock speculation. If the stock is always one hundred yuan, will you fry it? If you are sick, you will fry it. You only pay the commission every day, and you will not earn a penny.

Therefore, it is necessary to move and move, so that derivatives will be derived and the trade will further expand.

So this is the second question.

The third problem is to prevent systemic financial risks.

In recent years, we have been talking about preventing regional risks and systemic risks. We always feel that there are ghosts, but where are the ghosts?

Therefore, we must know where the risk may arise, and then I will keep an eye on it, and I will catch you as soon as I get out.

The core question is, where do you want to know, where will it appear? In fact, in the process of joining the SDR, no matter how IMF joins SDR, it does not necessarily require the opening of capital account.

However, in fact, the opening of China's capital account has been greatly increased.

For example, it is required that the offshore monetary authorities freely enter the offshore and offshore markets of the renminbi. Is this not the capital account liberalization? It also includes the current Shanghai and Hong Kong links, and is still discussing Shenzhen Hong Kong pass. Are these not all capital markets open? Therefore, in fact, more and more are open.

It discusses several conditions for the security of capital account liberalization.

First, we must use stable macroeconomic and financial conditions.

This sentence, almost all of which has been studied by the financial capital account, has heard this sentence. But I see a lot of influential scholars. What does he say about the sound macroeconomic and financial conditions? China has a good GDP in the world, and has continued to grow rapidly for 30 years. Our exports are still good. The proportion of Global trade continues to improve, as well as the largest foreign exchange reserves in the world, and occupy the 1/4 of the global foreign exchange reserves. Prices are stable and the society is stable. But what does IMF have to say to you?! the first sentence of IMF is a credible exchange rate arrangement.

Only three exchange rate regimes are credible.

First, the monetary authority system in Hongkong is fully open to capital account and abandonment of monetary policy autonomy.

Second, this pattern of the US and India is completely open to capital account and full floating is stable.

Third, China was stable before 2005, and capital account was strictly regulated, but it was also fixed exchange rate.

So, IMF says a credible exchange rate arrangement is a flexible exchange rate arrangement, which can absorb external risks. If you are pegged, you need to have financial and labor market flexibility.

What is the relationship with the labor market? If it is pegged, the real effective exchange rate will easily happen, so if the exchange rate can not be moved, the domestic cost must be adjusted.

Therefore, the wages of the labor force will rise and rise, and they will fall down if they want to go down, but this is a dream.

So the global fixed exchange rate is a twin brother with capital account control.

Now let me show you an Asian legendary country, that is, India.

The legend is that Asia has experienced many storms, but India remains aloof.

In 1997, the Asian financial crisis accelerated the growth of India's economic momentum.

In 2008, the growth of GDP in India was earlier than that in China, and India did not produce "four trillion" at all.

Now the emerging economies are slowing down as a whole, but India has bottomed out at the end of 2012, and has now started a sustained and steady recovery. India's growth has now surpassed us.

What kind of legendary magic weapon does it have?

Take a closer look. First of all, India has been trading deficit since 1990, and there is no surplus.

Then, let's take a look at the year-on-year growth of India's GDP and the exchange rate of the rupee against the US dollar in India. I reversed it. If it was negative year-on-year, it would be the rupee's appreciation. That's exactly the rupee's depreciation.

Basically the same as India's economic growth, the economic slowdown will depreciate and the economy will accelerate.

Therefore, this flexible exchange rate buffered the external shocks.

On the whole, it shows a better degree of stability.

Correspondingly, we often say that the renminbi now has the basis of depreciation, because the current surplus is so large. In fact, the surplus has nothing to do with the rise or fall of the exchange rate. Now that the flow of capital account is bigger and bigger, it is enough to offset the change of surplus.

Before Indonesia, almost a straight line was fixed exchange rate before 1996.

But in 1997, the Asian storm blew it up. What followed? Indonesia's surplus increased sharply.

Its GDP growth is a red line, and Indonesia's economy has been more stable than before.

When we talk about the elasticity of money, we all know that one algorithm is volatility.

You see, this is the major economy before capital account liberalization.

The volatility, which has been relatively high before opening up, has not happened to any one of the capital accounts. Although some economies do not see them in the right eye, such as those in India or even India now, we all feel that their macroeconomic fundamentals are not very good.

The dwarf here, the elasticity of exchange rate is too low, and finally burst when it opened.

Therefore, macro hedge funds invest only one thing, which is called "unsustainable".

You can see this picture. I don't read it. After you finish reading, your experience is yours.

Now, let's take a look. This is Geithner's original words. He recalls that Asia.

Thailand ignored the warning issued by the International Monetary Fund, the danger of fixed exchange rate and short-term foreign exchange loans. The leaders of Thailand did not self adjust, but went the old way of Mexico. They used foreign exchange reserves to maintain an impossibility to maintain the pegging rate to the US dollar. They expected the storm to pass, but failed. In the crisis, the Central Bank of Thailand sold dollars held in the forward market to cover up the seriousness of the problem.

The spread of the crisis to Indonesia, Malaysia and South Korea with the same fixed exchange rate, Brazil, Argentina and Mexico also appeared similar to that in the Asian market, and investors dared to escape in the spread of the crisis.

Then, before the crisis, Asia's credit balance doubled in three years.

The meaning of the period is understood by everyone, and I will not explain it.

So, my final conclusion is the three sentence:

First, marketization is a necessary prerequisite for avoiding suspicion of currency war, rather than a so-called stability under control.

Second, marketization is the only way to further improve the level of internationalization, rather than an artificial appreciation.

Third, marketization is the key hinge to eliminate systemic risk thoroughly. We must let the RMB float freely before the opening of capital account, instead of relying on large scale foreign exchange reserves.