Tuesday, March 30, 2010

More On Asian Currencies

Damn... and I thought I could get away with my flimsy comments on currencies ... along comes a regular learned reader in Hisham, an obvious economics research guy somewhere.

What's interesting was that he figured the MYR is not really tracking the yuan but rather keeping in step with the SGD - how I wish that was the case man ... maybe the relationship held true for 2-3 years ago but certainly not the past 10 or 15 years. There is no possible way we can afford to keep in step with SGD noting the huge structural differences in the industries' revenue base and margins achieved.



to me
show details 9:29 AM (53 minutes ago)

hishamh has left a new comment on your post "Geithner Could Label China As A Currency Manipulat...":

With respect, I don't think any of the Asian currencies are really much out of line. Some experts
do think the Renminbi is as much as 40% undervalued, but the range of estimates is incredibly wide - Goldman Sachs for instance thinks if anything the Renminbi is slightly overvalued. It really depends on the model used to measure misalignments.

The widest misalignments tend to come from current account based evaluations, which ignore stage of development and is also highly normative (i.e. depends on the researchers' prejudices). Econometric based models tend to show much smaller undervaluations, and a price-level based model, which accounts for the level of development of a country, shows very little undervaluation at all.

I'm wondering what the reaction will be next month as China is reportedly going to report its first monthly trade deficit in decades.
BTW, factually, HKD is not on a fixed peg but a currency board, which is a very different animal (essentially Bernanke is running HK's monetary policy).

Using the IMF methodologies, SGD is undervalued, as is the MYR. But the IMF assessment IMHO has a serious flaw, because they heavily overweight the US and underweight Asia in calculating the effective exchange rate indices, which biases misalignment measures towards the USD and away from currencies of other trading partners.


In Malaysia's case, the US trade weight used is double the actual, while MY-SG trade weight is a fraction of the actual (ASEAN currencies are lumped together, and the trade weight is something like only an eighth of the real trade share).
Using a more balanced weighting scheme shows that in the MYR case at least, the currency is moving within a normal trading band around its long term equilibrium value (about plus-minus 5%).

2nd BTW, the IMF's latest country report examined BNM's currency intervention statistically and didn't find any evidence of manipulation of the MYR level. My own investigation into the matter suggests that if anything, the MYR tracks the SGD, not the CNY and nowhere near the USD. Given the relative development paths of the two countries and the long standing depreciation of the MYR against SGD, it's hard to argue from the empirical evidence that BNM is surreptitiously leaning on the MYR at all.

Taken all together, I would argue that most surplus countries don't have undervalued currencies at all - it's primarily a USD problem. The 30% depreciation of the USD since 2002 is nowhere near enough, as that was started from a point where it was already highly overvalued. All this brouhaha is a way for the US to get away from having to bear the adjustment costs of reducing global imbalances.
China's position is understandable and I fully support it. It's their problem, but they want us to pay for it.


China returned to a quasi peg against the USD in 2008, meaning that, as the USD appreciated as the world suffered a liquidity crisis, so did the RMB. However, with the USD depreciating in 2009, the RMB did as well, despite the divergence in the two countries' growth outlooks. Given Chinese productivity growth, the RMB may be undervalued.

John Williamson and William Cline, Peterson Institute: Chinese productivity growth has outstripped the pace of appreciation of the RMB, meaning that the renminbi remains undervalued. According to the fundamental equilibrium exchange rate (FEER) model, the RMB remains about 20% undervalued on a trade-weighted multilateral basis, in real effective terms. A 40% appreciation against the USD is needed.


Goldman Sachs believes that the renminbi may be near fair value, based on relative prices and productivity. According to the Goldman Sachs Dynamic Equilibrium Exchange Rate model, the renminbi was no longer significantly undervalued in Q1 2010.

Helmut Reisen of the OECD assesses the renminbi's valuation based on the Balassa-Samuelson effect and finds it is only undervalued by 12%. Part of the undervaluation of China's currency is due to the fact that non-tradable goods are relatively cheap, mostly because of lower wage costs. However, there will be a convergence as China's productivity in traded goods rises. Monetary restraint and lowered corporate savings would accelerate the convergence. Despite large FX intervention by Asian central banks, most Asian currencies will continue to appreciate in 2010 due to the global carry trade (Australia, New Zealand, Indonesia, Philippines), high commodity prices (Australia, New Zealand, Indonesia, Malaysia) and strong equity inflows (Indonesia, India, South Korea, Taiwan), though smaller current account balances (India, South Korea) might limit appreciation pressures.

Appreciation of the Chinese renminbi will be delayed, or so Beijing would hope for, until export recovery is certain, therefore delaying the pace of appreciation of other Asian currencies that closely track the renminbi. Countries like India, Indonesia, Singapore and South Korea might allow currency appreciation to contain import inflation.

While capital inflows into the equity and debt markets might continue to support the MYR in 2010, movements in the currency will be determined by the central bank’s FX intervention and the current-account balance. The upward trend in the ringgit against the U.S. dollar and the revival of capital inflows into the equity market have increased central bank intervention in the FX market to support exports.

Central bank intervention in the FX market will remain dominant until exports and global commodity prices recover, and China allows the renmimbi to appreciate. Large FX reserves and external surpluses are a plus to deal with export contraction and weak capital flows. Trends in the USD and Singapore dollar will also be important determinants of the MYR's movement. In 2008, the central bank intervened in the FX market to protect the ringgit from sharp depreciation amid capital outflows.

In May 2009, the ASEAN+3 countries agreed to increase the FX reserve pool under the Chiang Mai Initiative to US$120 billion to allow members to defend their currencies. They also eased restrictions on accessing the pool.

In February 2009, to promote bilateral trade and investment, the central banks of Malaysia and China established a US$11.12 billion currency swap arrangement for three years.

p/s photos: Angelababy Yang Wing

1 comment:

hishamh said...

Nice rejoinder ;)

I've read the reports you quoted - the articles based on the Williamson and Reisen papers are available on VoxEU:



I love the graph Reisen put together, and if I've got the time I'm going to try and reproduce it. My critque of the Williamson paper is here:


My assessment of MYR parity is based on volatility, not levels. A peg implies zero volatility - if BNM were tracking any foreign currencies in a basket, it would show up statistically as low volatilities (day-to-day movements) relative to other (non-basket) currencies.

From the point of the MYR float in July 2005 to end-2009, SGDMYR is 0.324%, versus 0.347% for USD and 0.349% for CNY.

Taking the sample back ten years (Jan 2000-Dec 2009) would include the USD peg, which isn't quite fair. ;) But for the sake of completeness, SGD: 0.295%, USD: 0.232%, CNY: 0.234%.

Take it back fifteen (Jan 1995-Dec 2009), and we see SGD taking the lead again at 0.491%, USD 0.549% and CNY 0.551%.

TBH, I'm not the only one to note the close relationship between MYR and SGD - one Japanese researcher called BNM FX policy in the 1980s as a SGD-peg, not a USD-peg.

In reference to the levels, I would characterise it as a peg of the real equilibrium levels, rather than the nominal levels. I expect the MYR to continue to lose ground against SGD over the next decade or so, before the trend reverses.