China's Lower June Reserve Growth Due to RRR Hikes Paid in Forex
The smaller accumulation of foreign exchange reserves in June likely reflects the impact of the 100 bps in reserve requirement hikes during the month. We estimate that banks holding around 70% of the deposits in the banking system were forced to pay for these reserve requirement hikes in foreign currency, which likely reduced headline foreign exchange reserve levels by around $40-45 billion.
Fannie Mae, Freddie Mac Turmoil Stuns China's Forex Reserves
The new Fannie Mae/Freddie Mac debacle puts China's huge USD reserve not only at depreciation risk but also reevaluation risks caused by the decrease in value of US government and corporate bonds. China's forex reserve management departments have to think about how to manage downside by diversifying its reserve assets.
RMB's Inconvertibility Still an Impediment for Investments
At the moment, renminbi foreign exchange contracts traded in Chicago are termed "non-deliverable". While this type of operation is supported technically speaking in Chicago as well as the Singapore Foreign Exchange Market Committee, The Tokyo Foreign Exchange Market Committee and the Treasury Markets Forum of Hong Kong, the bottom line is that "non-deliverability" does not allow the "invisible hand" to work.
RMB's Steady Appreciation May Yield to Fluctuation
The RMB may see long-term fluctuation in the future. The current fluctuation rules of the RMB, different from the steady appreciation in the past, will help to increase the flexibility of the exchange rate, better represent the supply and demand of the whole market and weaken the attraction to hot money.
Asian Currencies' Drop May Slow RMB Appreciation
As the U.S economy slows, oil prices rise and international capital flows becomes hard to predict, the depreciation in the first 4 months of 2008 of some important Asian emerging market currencies against the dollar is perceived by some market watchers as perhaps the beginning of a turning point, and is very likely to slow RMB appreciation in the latter half of the year.
RMB Mark-Crossing Appreciation Both a Treat and a Peril
On April 10, the central parity rate of RMB dropped through the 7:1 barrier, standing at 6.9920 to the US dollar, according to the China Foreign Exchange Trade System, marking an historical moment for China's economy. RMB appreciation is beginning to transform China from a labor power to a capital power, and is driving China to play an increasingly important role in the global monetary system.
Hot Money: Both Inflows and Outflows Have China Worried
China's foreign exchange reserve has swelled since the beginning of 2008. Confronting the overspill from the US financial crisis, China is worrying whether hot money will accelerate its flow into the Chinese market or reverse course and flood out of it. Figures from the last two months favor the former, showing hot money inflows becoming ever more severe.
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