How Large Is The Excess Currency Depreciation Of Emerging Economies?

Now the yuan devaluation is still very strong, so the central bank's control over RMB capital terms has been further strengthened, but regulation may strengthen the expectation of devaluation.

Foreign trade surplus, foreign exchange reserves and economic growth prospects are the main factors affecting the exchange rate? From the perspective of purchasing power parity, the currencies of many emerging economies are over depreciated. Why? Why is China's second largest economy and the largest foreign exchange reserve in the world?

In terms of the internationalization of the RMB, from the angle of inhibiting asset bubbles, or from the angle of preventing inflation and narrowing the gap between the rich and the poor, we should strictly control the size of the currency, which is exactly the same as the goal of structural reform on the supply side.

Accordingly, we can predict that foreign exchange control will be further strengthened in the future. After all, risk prevention is the first place. Therefore, the depreciation of RMB will be gradual. If the monetary scale can be effectively controlled, the rate of depreciation should be limited, although the growth rate of GDP will slow down correspondingly. If the scale of money is not effectively controlled, the road of depreciation will be very long.

Why do emerging economies generally depreciate their currencies? The logic is very simple, because compared with the freely convertible international currencies in developed economies, their liquidity and convertibility are poor, and their sovereign credit ratings are also poor. This is like a motherboard stock and a new three board stock. The former has good liquidity and high financial pparency, and the valuation level can certainly be higher than the latter.

Theoretically speaking, the risk premium is usually equal to the liquidity premium plus the credit premium, and the risk premium rate of emerging economies is higher, so the phenomenon of super depreciation has become the norm.

Every year, the International Monetary Fund (IMF) estimates a purchasing power parity (PPP) in dollar terms for each country's currency. It has been counted by some people. When the nominal total GDP of the world in 2011 exceeded 72 trillion dollars, the total GDP calculated by IMF's purchasing power parity reached 90 trillion. That is to say, the currencies of other countries except the United States were underestimated by about 25%, of course, the currencies of the emerging economies were underestimated.

For example, in 2016, Russia's per capita GDP of purchasing power parity calculated at IMF was US $26109, but the nominal per capita GDP was only 8058 US dollars, which was lower than that of China. Therefore, according to the theory of purchasing power parity, the ruble dollar exchange rate was underestimated by 2.24 times (26109/8058 minus 1); similarly, India was underestimated 2.87 times, Brazil was underestimated 0.77 times, and China was underestimated 0.83 times.

We may refer to these multiple as the risk premium rate of our local currency.

Although purchasing power parity is a theoretical result, it can basically reflect the difference between the goods and services available in different countries using equivalent US dollars.

China has a much lower risk premium rate than India and Russia in BRICs. Is this related to foreign exchange control? For example, Taiwan, a high-income region, has a higher risk premium rate than the mainland.

The nominal depreciation rate of many emerging economies is mainly due to the fact that most of them rely on currency expansion to cope with economic difficulties. So are the BRICs of China, Brazil, South Africa, India and Russia.

For example, at the end of 1976, the exchange rate of US $1 against the India rupee was 8.97, and now it has risen to 66.7. In the past 40 years, the depreciation rate of the rupee against the US dollar has reached 644%, and Russia has depreciated more than 80 times (1 =0.74 rubles at the end of 1976).

China's depreciation rate in the past 40 years is not large, though more than 250%, but much smaller than that of other emerging economies, which may be related to foreign exchange control.

In addition, foreign trade surplus and massive inflow of foreign capital have made China the largest country in foreign exchange reserves. Does this contribute to stabilizing the currency?

China's accession to the SDR indicates that the prospect of RMB becoming an international currency is more clear. However, the progress of exchange rate formation mechanism and capital account liberalization seems to be slower than expected. Especially after the RMB's depreciation is expected to rise, foreign exchange control has also been strengthened.

Will the strengthening of control weaken expectations or strengthen expectations? The RMB has FOB and FOB prices, FOB is always higher than the FOB price, but the spread is not large. It seems to indicate that the exchange rate depreciation is not large under the condition of no regulation.

But after all, the renminbi can not be freely convertible under capital terms, and foreign exchange can not be freely entered or exported.

For example, China and India also have managed floating exchange rates, but the floating rate of India is larger than that of China.

In terms of financial openness, China is also lagging behind India.

This leaves a suspense on the extent of the Yuan's free convertibility and the extent of its depreciation under capital terms.

We can find the "reasonable" exchange rate level through the parity relationship between M2 and GDP.

For example, in 2000, the exchange rate of RMB against the US dollar was 8.28:1 at the beginning of 2000. At the same time, GDP was calculated in 2000 as an unchanged price (according to the current revised data). In 2000, the scale of M2 was 13 trillion and 500 billion, 1 yuan M2 corresponding to GDP was 0.77 yuan, and now, 1 yuan M2 corresponds to GDP of 0.27 yuan.

In 2000, the US $1 M2 corresponds to the GDP of US $2.6, and now the corresponding GDP of US $1 corresponds to US $1.3, which is US $2.6.

According to this ratio, the exchange rate of RMB against the US dollar is 11.6:1.

It is a bit crude and crude to deduce the reasonable exchange rate of RMB based on the ratio of GDP to M2.

First of all, in 2000, whether the RMB exchange rate 8.28:1 was a balanced exchange rate was also a question mark, though the black market price and the official price were very close.

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Secondly, not only because China's GDP is different from that of the US GDP, but also leads to the underestimation of China's GDP, and the difference of industrial structure between China and the United States makes GDP lack comparability, for example, the second industry in China's GDP occupies a relatively high proportion, and in the past, it has been over 50%, while the United States is less than 20%. The output of the second industry is mostly tradable, which belongs to the global pricing, while the output of the third industry is mostly non tradable.

Therefore, the statistical caliber and structural difference of GDP can also be reflected from the purchasing power parity between the two countries.

Third, when choosing a different base period, there will be differences in the parity relationship between M2 and GDP.

Just as Wang Xiaodong took the 2006 as the base period (the RMB entered the revaluation stage), when the exchange rate of RMB against the US dollar was 1:8.08, the 1 yuan M2 corresponding to the 2006 non change price corresponds to 0.63 yuan GDP, which is now 0.32 yuan GDP, and at the same time, the 1 US dollar M2 calculated according to the 2006 variable price is 1 US dollars, which is now 1.19 US dollars.

According to this ratio, the exchange rate of RMB against the US dollar should be 9.5:1.

Although there is a great deal of problem in calculating the theoretical exchange rate with the ratio of M2/GDP, it is a fact that there is no doubt that the money supply in the past 20 years is a little more than the scale of GDP. Especially after 2009, the growth rate of money continues to grow. This is against the principle that the scissors difference between economic growth and currency growth should not be too large. Do not think that the increase in M2 is not a big problem because CPI has not increased significantly. As mentioned before, inflation, asset bubbles and devaluation are all manifestations of excessive currency supply.

As the output index, GDP must pay close attention to the amount of investment behind it and whether it is reasonable.

For example, in 2014, the GDP target was 7.5%, the M2 growth target was 13%; in 2015, the target of GDP was around 7%, the growth target of M2 was 12%, and the target of GDP in 2016 was 6.5%-7%.

But the growth rate of M2 has increased to 13%, obviously it has invested more and less output. At present, the problem caused by excessive currency is reflected in at least two indicators of assets and exchange rate.

At the same time, we also need to pay attention to the phenomenon that the quantitative easing monetary policy will lead to a big gap between the rich and the poor.

For example, after the US subprime mortgage crisis, the M2 growth rate has also gone up sharply, and the Gini coefficient of all the US depositors has reached 0.48. This may also be an important reason for the victory of the trump election, because Obama used too many financial means to stimulate the economy during the past 8 years, which led to the widening gap between the rich and the poor, which led the middle and low income groups to occupy the Wall Street.

From a general sense, the more foreign exchange reserves, the more foreign currency assets correspond to, the better the stability of the local currency.

But in fact, foreign exchange reserves in emerging economies are not small, especially in the BRICs, such as China's foreign exchange reserves are the world's largest, while Russia, Brazil and India are among the top ten in terms of foreign exchange reserves, but nominal exchange rates are substantially lower than the real exchange rate.

Even if China's Taiwan, such as China, has third of the world's foreign exchange reserves (434 billion US dollars), the nominal exchange rate is also derogatory.

Wang Xiaodong studied the trend of the US dollar index (Major), which refers to the 7 major international currencies, such as the euro, yen, sterling and so on, and found that the US dollar index has only depreciated by about 15% today. However, the US dollar index (OITP) of some 20 countries such as China, Russia, India, Brazil, South Africa and Mexico has appreciated more than 70 times in the same period of time. The US dollar index (OITP) has only depreciated by about 15%.

Although the economy of the OITP countries is flourishing relative to the major countries, the exchange rate has exceptionally depreciated.

Why is the appreciation of the US dollar index (OITP) so exaggerated? If it is neither the reason for the insufficient foreign exchange reserves nor the slow economic growth, it can only be the reason why the currency has exceeded its value.

Because exchange rate is essentially a supply and demand relationship between one currency and another.

Such as India's economic growth in the past two years, the world's leading, has surpassed China, overseas direct investment scale also surpass China, become the world's first, but the India rupees still maintain the trend of devaluation.

The US dollar relative to other developed countries has only depreciated by 15%. The small change is really unthinkable. After all, after 43 years, the fluctuation of the US dollar index (Major) is so small that most developed countries do not spoil currencies.

For example, in recent years, Japan has been very weak in economic growth or export and negative interest rates have been implemented. However, the Japanese yen has not seen a trend of depreciation or appreciation against the US dollar, for example, at present, the US dollar to Japanese yen is around 106, which is very small compared with the exchange rate level (around 100) 10 years ago.

Japan's M2 at the end of 2006 was 714 trillion yen. Now it has risen to only 9 million 400 thousand yen, and the M2 in 10 years has increased by only 32%.

Why is Japan's currency growth so slow? The reason is that the balance of loans in Japan has been declining over the past 10 years, although the overall GDP is still rising.

But China's M2 has increased by 345% over the past 10 years.

Whether they are Japan or the United States, their central banks are crazy about money supply, but commercial banks are very temperate, which is the fundamental reason for the stable value of money in developed countries.

But the emerging economies are different. For example, the central bank's base money is not very large. In August this year, the central bank's total assets amounted to 33 trillion and 400 billion (19 trillion and 900 billion in 2008). The total assets in the past eight years increased by 67.8%, and most of the basic money was generated by foreign exchange (about 26 trillion). This shows that the central bank has not significantly increased its balance sheet.

However, China's commercial banks still expand the credit scale under the condition that the statutory reserve rate is as high as 15%. For example, in early 2000, the credit balance of China was only 9 trillion and 300 billion, which has now reached 108 trillion and 300 billion, and has expanded by more than 10 times.

The speed of credit expansion is much faster than that of GDP. As a result, the total net profit of listed banks is more than half of the net profit of all listed companies.

Therefore, the most important factor determining the change of exchange rate should be the money supply. Just like inflation is a monetary phenomenon and housing price is a monetary phenomenon, exchange rate is also a monetary phenomenon. Once the currency is over, its energy will always be released, or inflation or asset bubbles, and the currency will depreciate.

It is just that the process of excessive currency growth may not be inflated or deflated. It may not lead to asset price bubbles, or underestimate asset prices.

But in the long run, excess liquidity will surely lead to asset bubbles, inflation and currency devaluation.

As for economic growth, foreign trade surplus and capital inflow scale, the impact on exchange rate may be indirect and difficult to quantify.

Perhaps their real exchange rate effects are more obvious, as reflected in purchasing power parity.

But the real meaning of the real exchange rate does not seem to be large, because most people only care about nominal exchange rate, and use nominal exchange rate to measure wealth and participate in related economic activities.