Think about free trade this way; "secret" currency exchange

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Jun 3, 2002

For those who are unaware, Chinese currency (i.e. yuan or renminbi) is under a fixed exchange rate system, meaning it's closely controlled by the Chinese gov't and has been artificially kept lower than it otherwise would if it were allowed to freely float on the open market the way U.S. dollars and Euro do. The Chinese do this because the weaker their currency, the more profitable it is for Chinese companies (who make profits in yuan) to export their products overseas (i.e. "trade"), and a good portion of their economy depends on exporting. However, from the U.S.' perspective, this can lead to a higher trade deficit making our trade agreements with China more unfair, in terms of generating economic activity for the U.S., as Chinese exporters suddenly have this built-in advantage over foreign competitors (i.e. the US!) due to China's artificially lower-valued yuan exchange.

So, the whole point here; this Bloomberg article shows that banks in China (at least one, Bank of China) is allowing affluent Chinese to directly exchange their yuan for U.S. dollars and parking that cash overseas, a ton of which goes to U.S. properties (at what exchange rates, we don't know). This is great in that it's likely a precursor to freely floating yuan (maybe that's blind hope on my part), but for now the "official" gov't line in China is they don't allow more than $50,000 converted annually.

While yuan exchange rates doesn't register on the U.S. political radar that frequently, China is a powerful player in fair trade with the U.S., impacting thousands of jobs that have not been created as a result of unfair trade (in part), in addition to the fact that the affluent and burgeoning middle and upper middle class Chinese invest heavily in U.S. properties and assets (in the many billions already), something a free floating yuan will only accelerate.

For those interested in recent yuan movements, see the WSJ article here (I'll copy/paste for those without subscription) and an article here.

Bloomberg article said:
Secret Path Revealed for Chinese Billions Overseas

For years, wealthy Chinese have been transferring billions worth of their money overseas, snapping up pricey real estate in markets including New York, Sydney and Vancouver despite their country’s currency restrictions.

Now, one way they could be doing it is clearer. Last week, when China Central Television leveled money-laundering allegations against Bank of China Ltd., the state-run broadcaster’s report prompted the revelation of a previously unannounced government program that enables individuals to transfer their yuan and convert it into dollars or other currencies overseas.

Offered by some banks in the southern province of Guangdong, across the border from Hong Kong, the trial program was introduced in 2011 for overseas property purchases and emigration and doesn’t constitute money laundering, Bank of China said in a July 9 statement. The transfers were allowed by regulators and reported to them, the bank said.

“What it shows is the government has been trying to internationalize the renminbi for a lot longer than we thought,” Jim Antos, a Hong Kong-based analyst at Mizuho Securities Ltd., said by phone, using the official name for China’s currency and referring to policy makers’ long-stated goal of allowing the yuan to become freely convertible with other currencies. “I’m rather encouraged by this news because this is the way they need to go.”

China’s foreign-exchange rules cap the maximum amount of yuan that individuals are allowed to convert at $50,000 each year and ban them from transferring the currency abroad directly. Policy makers have taken steps in recent years, including allowing freer movements of capital in and out of China, as they seek to boost the global stature of the not-yet-fully convertible yuan.

“There’s a silver lining in this incident as it may force the regulators to address the issue in a more open and transparent way,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said by phone. “This is an irreversible trend.”

The issue came to light after CCTV said Bank of China helped customers transfer unlimited amounts of yuan abroad through a product called Youhuitong, which means “superior foreign-exchange channel.”

Positives, Negatives

The program is another sign that China is testing methods to allow outward yuan flows before full convertibility, May Yan, a Hong Kong-based analyst at Barclays Plc, said by phone. The goal has been announced by policy makers since the 1990s, and is a step toward stated plans to make Shanghai a global financial capital by 2020.

“For an experiment, you want to see if there’s any positives or negatives,” Yan said. “When the bank or the regulators can accumulate that experience, then they will decide if they want to move forward, or broaden it or shut it down.”

The central bank in February unveiled rules to make it easier for companies with operations in Shanghai’s free-trade zone to move yuan in and out of the country, a further loosening of controls on currency flows. The yuan surpassed the euro as the world’s second most-popular currency in trade finance in 2013, according to the Society for Worldwide Interbank Financial Telecommunication.

The Guangdong branch of China’s currency regulator, the State Administration of Foreign Exchange, picked Bank of China, China Citic Bank Corp. (998) and a foreign lender to let individuals transfer yuan abroad in a trial the banks were told not to promote, Time Weekly reported in April 2013. A Beijing-based Citic Bank press officer declined to comment on the program.

$3.2 Billion Estimate

While Bank of China didn’t provide figures, the 21st Century Business Herald estimated the lender has moved about 20 billion yuan ($3.2 billion) abroad through Youhuitong, citing people with knowledge of the trial program. “Many commercial banks” in Guangdong offer a similar service, Bank of China said in its statement, without naming them.

On CCTV’s website, the report on Bank of China hasn’t been viewable since at least July 12. Today, the story link led only to a series of advertisements. A spokeswoman for CCTV’s international relations department, which handles foreign media inquiries, didn’t immediately respond to an e-mailed request for comment on why the story wasn’t available.

PBOC Stance

The People’s Bank of China and SAFE didn’t reply to requests for comment. The central bank is “verifying” facts related to media reports of bank money-laundering, the official Xinhua News Agency reported July 10, citing a PBOC spokesman.

A delegation from Bank of China which was due to visit Frankfurt this week to discuss issues including a planned yuan clearing service in the city has canceled the trip amid the controversy over the CCTV report, the newspaper Handelsblatt reported today, without citing anyone.

Youhuitong has been suspended while the PBOC and its anti-money laundering bureau request records of all previous transactions, according to a person familiar with the product, who asked not to be identified because he wasn’t authorized to speak publicly.

Transfer approval for Youhuitong customers usually takes several weeks to a month, the person said. They need to provide documents showing how the money to be transferred was obtained, such as tax-payment receipts and proof of income, as well as a property-purchase agreement or proof of emigration, he said.

Preventing Abuse

Youhuitong customers would typically deposit yuan with Bank of China at least two weeks before the transfer, the person said. Once approved, the customer and the bank agree on an exchange rate before the funds are moved to an overseas account designated by the customer, he said. Money destined for real estate would go directly to the property seller’s account to ensure the cash won’t be misused, he said.

A Beijing-based press officer for Bank of China declined to comment. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), the nation’s two largest banks, declined to comment on whether they offer similar products.

HSBC Holdings Plc (5), which runs the largest branch network among foreign banks in China, offers its Chinese clients another way to access offshore mortgages while avoiding the cap on foreign-exchange conversion, according to a person familiar with the mechanism, who asked not to be identified without having authorization to speak publicly.

Local Laws

Customers deposit yuan with HSBC’s mainland unit or purchase its wealth-management products, and the bank’s overseas branch then issues a foreign-currency denominated mortgage using the China deposits as collateral, the person said.

“We seek to abide by the rules and laws of the jurisdictions and geographies in which we operate,” said Gareth Hewett, a Hong Kong-based HSBC spokesman.

Affluent Chinese have been moving money overseas in search of greater investment returns. China’s benchmark stock index has tumbled 66 percent from its 2007 record, while the government has clamped down on property lending to rein in rising prices.

Chinese buyers, including people from Hong Kong and Taiwan, spent $22 billion on U.S. homes in the year through March, up 72 percent from the same period in 2013 and more than any other nationality, the National Association of Realtors said in its annual report on foreign home purchases.

‘Mainland Money’

“Clearly the property market wouldn’t nearly be so robust as it is today without mainland money,” Mizuho’s Antos said. “How did they do it? With Bank of China’s help. There has been a tremendous amount of mainland money flowing offshore and it couldn’t have happened without” official approval.

Chinese have become the biggest investors in Australia’s commercial and residential property, with purchases surging 42 percent to A$5.9 billion ($5.6 billion) in the year to June 2013, according to the country’s Foreign Investment Review Board.

Vancouver’s real estate market has also seen the impact, having been “fueled tremendously in the last couple of years by high-end wealthy Chinese and Hong Kong buyers,” according to real estate agent Malcolm Hasman.

China needed to improve its oversight of capital flows after $2.7 trillion in unexplained funds moved overseas in the decade prior to 2012, Anthony Neoh, a former government adviser who helped the country open up to foreign money managers, said last year, citing data from Integrity International. Those funds fueled property bubbles in cities such as Hong Kong instead of being invested in domestic assets, he said.

“We know the demand to move abroad is there,” said ANZ’s Zhou. “Even if you impose various restrictions, the money will find its way out of the country, via underground banks and other means.”

WSJ article on yuan said:
The Chinese yuan recorded its biggest weekly jump in 2½ years, raising the question of whether the central bank's three-month weakening campaign is over.

After hitting a two-month high earlier Friday, the currency was quoted at 6.2107 to the U.S. dollar in late Asia trading. That was a 0.6% gain from a week earlier, for the biggest weekly increase since December 2011.

The yuan's renewed strength followed data on measures from exports to industrial output to credit supply that showed a rebounding Chinese economy. Reflecting a more confident leadership in Beijing, the People's Bank of China used its daily reference exchange rate to guide the yuan higher on four of the five trading days this past week.

This marked an about-face from earlier in the year, when Beijing engineered a 3% depreciation aimed at boosting exports and deterring inflows of speculative capital betting on the yuan's continued rise.

The abrupt reversal spurred a debate among analysts over whether the currency has reached its bottom and will resume its appreciation shortly.

"Our view is that better economic data and international diplomacy are at play here," Bank of America BAC +1.04% Merrill Lynch analysts said.

China's May trade balance came in stronger than expected, with a surplus of $35.9 billion. Manufacturing data and consumer inflation also showed signs of recovery, while banks are extending more corporate loans, relieving worries about a sharp slowdown in the world's second-largest economy.

The PBOC is seeking to stimulate growth by pumping more cash into the financial system through selective cuts in the reserve-requirement ratio—the portion of deposits that banks need to keep in reserve, rather than lending out—and so relying less on a weaker currency, the Bank of America analysts said in a report.

On the diplomatic front, Beijing may also be seeking to "deflect the criticism of China being a currency manipulator" before the U.S.-China Strategic and Economic Dialogue next month, they said.

The PBOC set the yuan's reference exchange rate against the dollar higher every day this past week except Wednesday, when it left the rate flat. The currency's daily trading is limited to a 2% band above or below this "central parity" rate. The band was doubled from 1% at the end of March.

The yuan's earlier, unexpected fall—at one point after the March band-widening, it was dropping at the fastest rate in a decade—burned investors who had used derivatives to bet billions of dollars that its yearslong rise would continue. The fall also prompted retail banks in Hong Kong to launch investment products that bet on a further decline. Myriad Asset Management Ltd., one of Hong Kong's largest homegrown funds, expects it to hit 7 to the dollar by 2016. The more yuan to the dollar, the weaker the yuan is.

But other investors are casting votes of confidence in the currency. "The long-term underlying trend of China hasn't changed at all: The country's current account is still a surplus, its growth rate is still much faster than most other countries," said Andy Seaman, Stratton Street Capital LLP's fund manager in London, who helps manage $1.3 in billion assets. He sees the yuan appreciating in the long term.

A report by HSBC's HSBA.LN +1.20% currency analysts calls the yuan's earlier fall an attempt by the PBOC "to inject two-way volatility again"—that is, make the currency regime more market-oriented.

For now, it may be too early to expect a full recovery in the yuan, says HSBC. "However," it adds, "the PBOC's recent actions suggest that the sharp selloff in the [yuan] has likely come to an end."


Dec 9, 1999
Wouldn't it be the most advantageous to the Chinese powers that be to let both keep continuing happening? I mean, fixing their currency fix would in effect take a lot of competitive power away from them, so why wouldn't they just continue to let the rich f*ckers there (of which you know they are kicking back to whatever Chinese officials they need to) do what they do under the radar, and keep the state sponsored currency fixing in? Win-win for them isn't it?
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