One way FT Alphaville has been covering the great Currency War of 2010 is by keeping a running list of recent sovereign interventionists.
But one issue that comes up time and again in doing so, is just how you treat the impressive array of constant interventionists — i.e. those countries that peg their currencies to the dollar, most notably China.
On the basis that they’ve always been doing it — and that it is nothing new — we’ve opted to exclude those sovereigns from our list.
But, in a recent research piece, Capital Economics does offer some analysis which makes us question our policy .
Note, for example, a comparison of Japan’s recent intervention with China’s constant operations.
In the third quarter, China reported a $195bn increase in its foreign exchange — the biggest on record. According to Capital Economics about $86bn of that figure can be put down to interest income on its existing stock of foreign securities and/or dollar exchange fluctuations in the period.
However, it still leaves a very impressive $108bn of outright foreign exchange purchases.
As the analysts note:
To put that in context, it implies that the People’s Bank spent
a little more every month last quarter than the Bank of Japan did in September. (Total Bank of Japan intervention last month amounted to roughly $25bn, according to figures from Japan’s Ministry of Finance.)
Not only is the cumulative intervention much larger, but the market belief that Chinese intervention will be sustained (alongside the limits capital controls place on speculative inflows, and low volume of renminbi trading in financial markets outside China) means that interventions by the People’s Bank are much more effective.
Which rather suggests that China’s participation in the ‘currency war’ should really not be ignored.
Related links:
On your marks, get set, devalue – FT Alphaville
A Zimbabwe rally effect? – FT Alphaville
Currency wars: sound bite of the week – FT Alphaville
25 interventions in a one week band - FT Alphaville