Thursday, September 28, 2006

All you wanted to know about yuan revaluation

September 28, 2005, www.rediff.com, Co-author-Vivek Kaul

China's move to revalue the Yuan on July 21, 2005, was hailed as a surprise. But its revaluation by 2.1% was definitely not surprising!
China once again proved its mettle by taking action on its own terms. It pegged the Yuan against a basket of currencies of China's major trading partners but refused to reveal the constituents of the basket.
Finally, the Chinese authorities revealed, almost a month after the revaluation, that the basket consisted of the US Dollar, the Yen, the Korean Won and the Euro.
On Thursday, July 21, 2005, the day Yuan was revalued, it closed at 8.11 Yuans per dollar. On that day, the Chinese officials announced that the Yuan will now be allowed to float against the dollar within a band of plus or minus 0.3% of the previous day's closing.
The band of 0.3% within which the Yuan is allowed to float against the dollar is too narrow and a 2.1% revaluation is just a drop in the ocean given that Yuan is said to be undervalued by as much as 40%.
Beijing made a move which will hardly have an effect on its exports and at the same time has managed to shut up Washington for some time.
Later, a band of 1.5% was announced for non-dollar currencies. On Friday, September 23, 2005, once again this band was widened further to 3% per day for non-dollar currencies. This means that now Yuan is allowed to float within a band of plus or minus 3% of the previous day's closing against non-dollar currencies and 0.3% against the dollar.
The different bands for dollar and non-dollar currencies will prove a difficult act to balance for the People's Bank of China as both these currencies are also trading against each other.
The Chinese pegging of the Yuan has been in the line of fire for a long time now. Yuan was pegged to the US dollar in 1994 at 8.28 Yuans per dollar. This has been a source of grief for most of the industrialised nations (G7 members), particularly the United States (US).
Nearly 10% of the huge current account deficit of the United States, which was a staggering $164.7 billion in the third quarter of last year, was on account of China alone.
People's Bank of China Governor, Zhou Xiaochuan, claims that China needs time to reform its financial sector. But the industrialised nations are becoming more and more desperate as they are getting increasingly aware of the fact that poorer countries are financing the current account deficits of industrialised nations.
The current accounts of all the G7 countries taken together are in a deficit. On the other hand, China had a trade surplus of $31.98 billion in 2004.
The move to revalue Yuan by China was seen as a way to ease the growing tension between the US and China, before the impending visit of the Chinese President Hu Jintao to Washington in September 2005. It is definitely not expected to make any significant improvement to the trade deficits of US with China or the fiscal deficit of US.
Heads I win. . .
Recently, the Hong Kong-based, China National Offshore Oil Corporation (CNOOC), a publicly listed company in which the Chinese government has a 71% stake, made a bid to buy Unocal, America's eighth biggest oil company, for an all cash deal of $18.5 billion.
CNOOC outbid Chevron, the American oil company which made a bid of $17 billion for Unocal. Even though the deal did not go through, this bid to acquire Unocal (and similar bids to acquire other foreign companies) signals that China is now following an aggressive policy of investing overseas to utilise its huge forex reserves.
For the Chinese government such deals make a lot of sense. These deals will help China to reduce the monetary impact of keeping its currency, the Yuan, undervalued. Since the dollars, spend in acquiring the overseas assets need not be exchanged for Yuan, this will lead to a real contraction in money supply.
If the Chinese are able to successfully execute this strategy then even without revaluing the Yuan to a great extent, China can prevent its internal economy from overheating.
This can become a thorn in the neck of Alan Greenspan and Co who have been relying on the consistent purchase of the American Treasuries at low interest rates by China and other Asian nations to finance America's burgeoning fiscal and current account deficit at extremely low interest rates.
This has also helped in keeping the inflation low. China is sitting on top of $700 billion of forex reserves of which $230 billion has been invested in American Government securities.
Now with Chinese companies actually prowling for overseas assets China's investment in American treasuries can go down. This might lead to increased interest rates in America.
So basically, now that the pressure to revalue the Yuan will be taken off China's back for sometime, China can relax and not go for any further revaluations and still be at a comfortable level.
. . . tails you lose
On the other hand, even if China goes for more revaluations of Yuan in the future, being a developing economy with a large and growing manufacturing sector, China's import demand is going to be continuously high in the coming years and the importers are going to benefit from a stronger Yuan.
Also, China is a net oil importing country with demand for oil expected to go up as China progresses, once again a stronger Yuan will benefit China, as the US dollar is the currency in which oil is traded.
The Chinese executives and analysts believe that the Chinese exporters will remain competitive even if the yuan appreciates, say by as much as 25%. It will still not make much difference to the Chinese businesses.
The competitive advantage of the Chinese firms goes much beyond just cheap labor and an undervalued currency. The Chinese firms have mastered the art of building plants and factories at much lower costs than it's possible in the Western countries.
Too early to celebrate
Malaysia has already dropped its peg to the US dollar just after the Chinese announcement and moved to a managed float against a basket of currencies. Those Asian countries which were not letting their currencies appreciate by resorting to sterilisation so that their exports maintain their competitiveness vis-a vis the Chinese, have let their currencies strengthen considerably since the revaluation announcement.
Is this just the beginning? We do not think so. It is the beginning of a very long wait. It may be too early to laud the People's Bank of China's move wholeheartedly. The Bush administration may see the revaluation as a victory, but the real victory will be if China continues to revalue the Yuan at regular intervals to bring it to its intrinsic value.
And this as of now seems too farfetched. It should not be forgotten that China has taken ten long years to make the small change that it did on July 21, 2005. From the comments of the Chinese officials in the past, it was clear that eventually the Yuan would be let free, but when that would be done was the question. And we are no closer to the answer now than we were earlier!

Wednesday, September 13, 2006

Whats wrong with everyone?

I am a kid. My parents remind me daily to study hard so that when I grow up, I earn a lot of money. I go to school. My teachers tell me that if I talk in the class, I will not be able to do anything in life. I will never make it "Big". I am growing up. Not "Big" though. I do everything I want to do, slyly though. As my parents will not approve of me playing cricket when I ought to be in the tuition class. They will not approve of me reading Enid Blyton when I should be reading the basic concepts of Physics. I will not make it to the IIT's if I do what I want to do, according to them. So I do everything I want to do, but I don't tell them. I know for sure that even if I do everything they want me to do, I will still not make it to the IITs.
I grow up. A looser in the eyes of my parents as I did not make it to any of the top ranked Engineering colleges. A looser in the eyes of all my relatives and teachers. I have learnt to live with it. I have learnt to turn a deaf ear to all of them. They keep complaining and comparing though. Why do they do it? Who is listening to them? Who is getting affected by it? No One. Not me atleast. I am happy. I am happy to do what I want to do. Stare out of the window and think about nothing. Cry and laugh whenever I want to. I have no intellectual image to maintain. No baggage to carry.
I am an engineer. Like everyone does now days, I end up working for a Software giant. And suddenly, I am a hero. Suddenly people start recalling incidences which never happened, but nevertheless they prove that I was always a very good student, a very good child, a very promising fellow, since my childhood. Revelations for me. I remember everything that was said about me in the past, they do not. Their perception has changed, I remain the same. The software giant has a huge appetite. It makes me work endless hours. I do. And I get handsomely paid for it. But, I have no time to look out of the window. I have no time to cry and laugh. I have no time to do what I want to do. I am doing everything the software giant wants me to do, my parents want me to do, my relatives want me to do. But I am not doing what I want to do.
I leave the job and take up an assignment with a smaller firm, which allows me to do as much work as I want to do and pays accordingly. This means, I have taken a huge paycut. And this also means that perceptions have changed again. Once again, I am a looser. And once again, I have turned a deaf ear to all the advices I get from my well wishers. I am happy. What else do my well wishers want for me? I do not want anything else. I just want happiness. I just want the time to gaze at the stars, to read books, to watch movies, to walk in the rain, to paint, to listen to music. What more do my well wishers possibly want for me? Money? But what will that money buy me? Time? If it cannot buy me time, if it cannot buy me happiness, I do not want it. What’s wrong with everyone? Why can't they understand these simple theories of my life? Why do they want me to lead my life the way they want me to lead it? Alas, there's no answer to these questions and I am afraid, some things never change, and my well wishers are amongst those things.
This is the story of all of us born after the early 1970's. In a race to make it Big, we forget the happiness that smaller things in life could provide. We keep running after things till we no longer know what we are running for. We forget to enjoy life and then a day will come when we would leave this world without knowing what life was.

Tuesday, September 12, 2006

Our own Daphne Du Maurier

After a long long time, I have come across a book, which is not a murder mystery or does not classify to be a thriller, which I was not able to put down. And no, it is not because of the story, it is because of the writing style. Well, that should not undermine the story which must be given the credit for being unique too.
We have had many authors of Indian origin doing well in the international literary circles. Inspite of their achievements, the writing style would be uniquely Indian. Take for example R.K.Narayan or V.S.Naipaul. The settings, the characters, the stories mostly revolve around India or Indians or people who reflect the Indian mindset. Over the years I had begun to believe that Indians cannot write like Gabriel García Márquez or Daphne Du Maurier and why should they?
That Summer in Paris by Abha Dawesar was a pleasant surprise which changed the notion that authors of Indian origin cannot paint with words. I was struck by the beauty of words used by the author. I had not experienced such urge to keep on reading a book just to find out how is the author going to construct her next sentence since I read Rebecca by Du Maurier.
Read this: "The spoken word was more fluid than the written; it could be modified with new words and adapt itself to the situation". This sentence made me rethink my belief that writing down once's feelings is more appropriate than speaking them. Spoken words are definitely more fluid, hence may be more expressive. Some expressions cannot be written about.
On the other hand this senence: "...the yin and yang of my life, the occident and orient, have really been about whether to devour all your books swiftly-for the pleasure of the moment, or to abstain-so that a new one and its promises are always on the horizon"...is exactly the way I used to feel when I was reading "Shantaram" by Gregory David Roberts. I don't think anyone else could have put it so beautifully. I had started associating with Shantaram so much that I did not want the story to ever get over. Everyday I would deliberately restrain myself from reading too many pages so that I could keep on reading the book for more number of days. And the day I finished reading the book, I felt a kind of emptiness. I felt a kind of loss which is difficult to write down, reinstating the authors words that "The spoken word was more fluid than the written".That Summer in Paris is not the first book by Abha Dawesar. Her previous work "Babyji" was also critically acclaimed and recieved many awards. Though, I must admit that Babyji gave me the impression of another one of those Indian authors trying to get recognition by overtly using sex and desire as the theme. I found it a grotesque narration of a confused, zealous, curious and perhaps a perverted girl.
But, with her latest book, Abha Dawesar has taken a leap which puts her in the same league as Du Maurier, Gabriel García Márquez or Lord Byron, in my eyes. In some of the places, her sentences reminded me of "She Walks in Beauty" by Lord Byron. Read this: "The point at which it diverges from reality is exactly where it becomes true. Its so strange. By being so unreal, it creates reality". Please don't get me wrong. What I mean is that the creation of her sentences struck me just like the creation of Lord Byron's sentences. Ofcourse Ms. Dawesar is only three books old (have not read her first book Miniplanner) and has a long way to go. It might be too early to shower so much praise on her. But then I am only talking about this one book. And That Summer in Paris is worth all the praise.