FINANCIAL ICEBERG

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China Currency Factor



​​Almost a week after the US election where Mitt Romney, who wanted to name China a currency manipulator without considering the evidence, lost the election, Chinese Yuan first closed on a slightly weaker note last week, then strengthens. Chinese Yuan is now stronger than it was before the election, and PBOC’s daily fixing has also strengthened accordingly. So at least we now know that it probably has nothing to do with politics ( see graph below )









So the next step is to ease Foreign capital rules to broaden the use and value ofthe Yuan.



​ China will clear the way for foreign investors' capital to flow in and out of the country more easily by waiving and simplifying regulations, the State Administration of Foreign Exchange, or SAFE, said on Wednesday.



In a statement published on its website, SAFE said that there's no evidence to suggest that the nation is seeing pressure from capital inflows, although the yuan has strengthened in recent weeks, mainly driven by increasing optimism about China's economic outlook.



Starting on Dec 17, foreign investors won't need to get regulatory approval to open bank accounts, remit profits, and transfer money between different domestic accounts, it said.



And the limits on the number of foreign-currency accounts and the amount of money that can be transferred will also be loosened, it added.



"We're making some progress in further opening up the capital account. Maybe it can't be called a 'big leap', but it shows that the government is determined to make the financial system more free and open, although it faces capital inflow challenges," said Guo Tianyong, a finance professor at the Central University of Finance and Economics in Beijing.



SAFE said it will cancel 35 rules on regulatory approval and simplify 14 others.



"The move is clearly designed to encourage long-term capital inflows, especially when short-term money flows are volatile," said Joy Yang, chief Greater China economist at Mirae Asset Securities (HK) Ltd, quoted by Bloomberg.



Analysts said that short-term speculative capital inflows have increased in recent months and drove the yuan to appreciate to record highs for several consecutive days.



However, the recent figures don't prove that the capital inflow pressure on China is significantly increasing, SAFE said.



An improvement in international financial markets coupled with China's relatively rapid economic growth will make it easier for the country to attract long-term and stable capital inflows, while uncertainty in the global economy and unstable market sentiment might cause more short-term volatility, SAFE said.



It added that as domestic companies continue to expand overseas, capital outflows are expected to increase in the future.



The move to facilitate capital flows related to direct investment came the day after Zhou Xiaochuan, the central bank governor, vowed to improve capital account convertibility.



The validity of capital controls has been declining as financial opening-up deepens, and China needs to further open up its capital account by extending convertibility for certain transactions and individuals, Zhou said on Tuesday.



Convertibility for direct financing, direct investment and credit operations should be further facilitated, Zhou said.



So the new Foreign capital rules change come at a time where capital outflows propably put some concerns on financial stability for China. Even with those new rules, the process of liberization of the Yuan will take place on a long time period ( to us Americans ). ​​

The Yuan is still in the process of being a currency progressing very slowly to a market based instead of a semi-pegged one. ​​ Hong Kong, the international banking community, the Chinese diaspora and China’s major trading partners will all slowly but surely increasingly rely upon the yuan as a unit of account, medium of exchange and store of value – the three primary functions of money.



​​The remaining difficulties of yuan internationalization under the current approach executed by the People’s Republic Of China were recently summarized by Yu Yongding, an economist advising the Chinese government. In a paper, ‘Revisiting the Internationalization of the Yuan,’ he writes, “Since late 2010, yuan internationalization has shown a clear pattern of asymmetry – the use of the yuan as an import settlement rose quickly, but not for exports. Yuan denominated bonds met strong demand, yet nonresidents had no incentive to issue them. And while Hong Kong, China banks are happy to extend yuan loans, they are not welcome by borrowers.”



This summation is an indictment of the current approach. In essence the Hong-Kong strategy to yuan internationalization has resulted in a currency that can’t fulfill the essential three functions of money.



Chinese Yuan VS US Dollar

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China Capital Flow : Foreign Direct Dis Investment

( From MacroBusiness, ChannelNewAsia,​ Bloomberg, IB Times)

Foreign direct investment in China declined in January, official data showed, extending a downward trend after falling on an annual basis in 2012 for the first time in three years.



FDI, which excludes financial sectors, fell 7.3 percent from the year before to $9.27 billion well ahead of consensus at -4.2% , the commerce ministry announced. It was also down from December's $11.7 billion.



China’s foreign direct investment fell for an eighth month in January, a sign that the recovery in the world’s second-largest economy has yet to revive confidence among overseas companies. ( See graph below ).





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