Development of better micro system and financial tools to control currency value and flows in and out of China are two of the primary goals of the Chinese central government master plan to get China’s domestic banks and capital markets ready for open banking in 2006. The new Chinese BBC rate adjustment regime addresses the first of the two most pressing issues, currency rates and capitals flows, particularly in and out of China.

No one in Washington is saying how much of a total revaluation China needs, but Congress is threatening a 30 percent tax on all Chinese imports into the US. The western media suggested a political starting point of a 10 percent first tranche good faith Chinese rate adjustment. Wall Street lobbies in Washington reportedly are crying for as much as 40 percent currency increases or four timed tranches.

The central government of China has been very firm in its rejections of Washington-Wall Street led forced adjustment of its currency. The Chinese currency rejection is based on the economic reality that foreign multinationals, not small Chinese national firms, account for $600 billion of China exports and would be least affected by a major currency adjustment. China has suggested that Washington get it owns financial house in order by balancing its budget, rather than forcing the world to rollover it’s almost $700 billion budgetary overages.

The peoples of China were told buying $200 billion of new US Treasury debt was helping the US federal government get its house in order. President Bush’s tax give away clearly demonstrated to the Chinese peoples, they are duped.

The Chinese people are enraged at the way the US federal government used their hard earned money. Most Americans are totally unaware of this Chinese and Asian out rage at the US federal government use of their investment in helping America back on its economic feet. It is in this context, China’s leadership has had a very hard time selling the idea to the Chinese people of any more financial give-backs to Wall Street or the Bush administration.

On Thursday, July 22, 2005 the People’s Bank of China, the Chinese central bank officially revalued China’s currency 2.1 percent against the US dollar from 8.110 up to 8.28 dollars. The Chinese central bank also informed the world of its adoption of a version of the city-state of Singapore managed floating exchange rate system after abandoning their currency pegs against the US dollar.

Scraping the renminbi (Chinese currency) peg to the dollar sent ripples of frustration running through the currency market last week. Most western analysts remain very disappointed, bordering on enraged at the small size of the symbolic revaluation of the renminbi. At the core of western rage is the lack of what western analyst thought would be the first of three 10-percent increases of the renminbi.

A massive Chinese rate increase would have allowed many western speculators to cash in on hundreds of billions of currency profits and millions in brokerage and banking fees. (See analysis below)

Under the new rate adjustment system, the renminbi will be allowed to increase 0.3 per cent against the dollar each trading day. A 10 percent increase in the 8.11 dollar renminbi from 8.11 to 7.30 would take 30 trading session or 45 days. This 0.3 percent maximum rate increase would give the Chinese central and other Asian central banks critical time to deal with an Asian economic crisis or an attack on Chinese or Japanese currencies by the west.

The new Chinese rate system is known as the "basket, band and crawl", or BBC. The key to the system is a rate based on an undisclosed basket of currencies of its main trading partners and competitors. China and Malaysia BBC systems appear broadly similar to that of Singapore, while some details of their systems are unknown. The Chinese/Malaysia band is narrower than the Singapore BBC and will be adjusted daily. The BBC regime format allows for the potential development of a common Asian currency and collective currency defense strategy.

The Bank of China’s move has already forced a ratcheting up of long-term US Treasury yields in defense of the US dollar. More importantly for the developing world capital markets, China has developed a currency exchange system based on a basket currency that floats within a set policy band which lets the currency crawl up and down instead of being subject to sharp fluctuations like the US dollar.

Given China’s economic penetration of Africa and Latin American, supporting their economic development require micro-currency management is a growing challenge. The secret policy band allows China to regularly adjust the currency basket to reflect the world market, not just a regional market or country. The band allows a new way to defend the Chinese currency against the US dollar. The BBC system also historically has kept Singapore’s inflation relatively low at 2 percent a year since the early 1980s. Over 40 other countries use some form of BBC. The BBC platform creates a powerful potential currency mechanism to free for developing countries like Nigeria, Brazil, Venezuela, Iran, India and Indonesia from US dollar control.

Singapore’s BBC has been in use since the 1970’s. One of the best aspects of the BBC system allows a country to maintain a close link between exchange rates and interest in an open economy. The regional potential of the China centric BBC is more economically dangerous in the near term than the immediate reality of the new BBC application in China. According to the Financial Times, if Japan and the rest of the emerging Asia economies follow Malaysia and appreciations similar in size to China initial revaluation of 2 percent the trade-weighted value of the US dollar would fall by less than 1 percent.

China and other Asian central banks are refusing to debase their currencies by 30 percent and still be forced to rollover $700 billion of US Treasury debt. It appears that support of China’s BBC by Japan’s central bank is mission critical. Western interests will attack the dependency.

One of the key aspects of the Chinese BBC system is that it allows the Chinese central bank to de-emphasize the importance of holding large amount of US dollars in its reserve currency portfolio. Also, the Chinese BBC system allows an orderly slow timeline for any upward adjustment to the currency.

There are many important reasons China made the rate adjustment and BBC move now. One of the critical reasons was trying to ease protectionist pressure particularly as the CNOOC/Unocal bid is working its way through Congress. Another is Chinese president Hu Jintao is preparing for a visit to Washington. Chinese currency policy protects Asian manufacturing and defenses against the massive debasement of Asian currencies.

The China application of the BBC is designed to maintain export competitiveness and control inflation. The BBC’s strong currency policy allowed the Singapore dollar to appreciate 20 percent against the US dollar. One of the keys to a successful BBC application is a well-regulated banking and financial system and large fiscal reserves.

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