Yuan expected to become major world currency

Extrait de: Yuan expected to become major world currency, Mark MacKinnon, Globe and Mail, Jun. 03, 2011

Chinese policy makers are moving toward the internationalization of the yuan, amid growing worries about the country’s exposure to the fiscal woes of the United States and the U.S. dollar’s role as the global reserve currency.

Li Daokui, an adviser to the People’s Bank of China, told The Globe and Mail that he believes the yuan – which is currently in circulation only in China and a handful of neighbouring countries under special agreements – will be a fully international currency within five to 10 years.

China, he said, has two goals in moving to increase the international use of the yuan, which is also known as the renminbi.

1.      The first would be to decrease the country’s reliance on the U.S. dollar, which he suggested should no longer be considered a safe haven following the near-collapse of the American financial system in 2008.

2.      The second goal would be to stabilize the international financial system by creating another major currency where investors could put their money in times of crisis.

“China definitely wants, as all countries do, the ability to fend off external volatility, external shocks,” Mr. Li said in an interview at the offices of Tsinghua University’s Centre for China in the World Economy, where he is director. “A three-currency world is much more stable than a two-currency world. People can choose; if they think the U.S. dollar is safe, they can put their money in U.S. dollars. If the renminbi is safe, they can put their money in renminbi. Or you can put half and half. If one country doesn’t behave in its macroeconomic policy, its currency will come down.”

Just as important to many Chinese is the sense that making the yuan into a major international currency is the next step in confirming the country’s new status as an economic and diplomatic power.

But a world in which the yuan is a major trading currency would necessarily look quite different from the one dominated by the U.S. dollar, forcing both the United States and China to confront the imbalances in their domestic economies.

Few expect Beijing to promote the yuan as an international currency without moving some of its own reserves away from the dollar. And it seems even more unlikely that money markets could be convinced to trust the yuan without Chinese authorities first loosening their tight control over its value.

Mr. Li’s comments hinted that many in Beijing are uncomfortable with the country leaving so much – $1.14-trillion (U.S.) – of its foreign exchange reserves in the U.S. dollar.

“It’s ironic, isn’t it? The U.S. is the epicentre of the global financial crisis, but the U.S. dollar is the monetary safe haven. The country is having much more financial trouble than China, or even Russia, but we put our money there,” he said. “By having an international currency, China is helping itself by helping the world.”

His comments matched a recent report issued by HSBC bank which predicted the yuan would join the dollar and euro as one of the main international settlement currencies some time later this year.

Mr. Li acknowledged that there were several major hurdles to the yuan taking its place alongside the dollar and the euro as a global force. The next step for China will be to promote the use of the yuan in international trade settlements, something that’s already on the rise. Rattled by the financial crisis, Beijing has signed currency swap deals with 11 countries – most of them in Asia – since 2008. The deals allow for trade between the countries to be conducted in yuan, rather than dollars.

The second thrust is to increase the use of the yuan in international finance, something also on the increase with the rising popularity of yuan-denominated “dim sum” bonds issued in Hong Kong, with companies like McDonald’s Corp., HSBC and the Asian Development Bank issuing yuan-denominated debt for the first time.

In the first quarter of 2011, 7 per cent of China’s total trade was settled in yuan. Meanwhile yuan deposits in the Hong Kong banking system had risen to almost $80-billion by the end of April, up ninefold since July, 2009.

The big question facing Chinese policy makers is how to accomplish the internationalization of the yuan without giving up their cherished control over its value.

An artificially cheap yuan has been one of the biggest drivers of China’s export-led boom over the past two decades, a model that won’t be lightly tinkered with. Just as crucially, since Chinese citizens can’t easily convert their yuan or send their savings overseas, banks here have been able to offer them low interest rates, benefiting big business and helping to fuel a surge in investment in domestic real estate and other markets.

Though the yuan has been allowed to gradually appreciate in recent months toward something closer to its real value, there is also concern that space could develop between the currency’s official level, as set by Beijing, and what it trades for in Hong Kong and elsewhere.

“There’s no reason, over time, why the renminbi won’t become a fully international currency, but it won’t become a reserve currency until it becomes a fully convertible currency,” said Ken Courtis, former vice-chair of Goldman Sachs Asia and founding partner of Hong Kong-based Themes Investment Management.

Mr. Courtis said the United States “would not be excited” by China’s moves to internationalize the yuan since it would likely mean Beijing would seek to diminish its holdings of U.S. debt.

In an article published this week in the official China Daily newspaper, Yu Yongding, president of the China Society of World Economics, called the internationalization of the yuan “necessary and indeed inevitable.” However, he warned the road ahead was filled with risks for China’s economy.

“To get the sequence of policy adjustments right is vital. The RMB’s path to becoming a truly international currency promises to be a bumpy one.”

Extrait de : The renminbi's journey to the world, By Yu Yongding, Chinadaily.com.cn,2011-05-30

BEIJING – Recently, HSBC bank released an upbeat survey predicting that China’s currency, the renminbi (RMB), will become one of three global settlement currencies (alongside the dollar and euro) sometime this year. It seems that the RMB’s internationalization has been progressing without anyone really noticing. The key remaining questions concern whether or not the RMB will become an important international currency anytime soon, and whether it is poised to pose a serious challenge to the US dollar’s domination of the international monetary system.

An international currency is used and held beyond the issuing country’s borders, and plays the role of unit of account, medium of exchange, and store of value for residents and non-residents alike. Certainly, there are many potential benefits for China to be gained from the RMB’s internationalization:

·         Elimination of exchange-rate risks to which Chinese firms are exposed;

·         Greater funding efficiency for Chinese financial institutions, thus strengthening their competitiveness in global financial markets;

·         A boost to China’s trade with its neighbors, owing to the reduction in transaction costs;

·         Less need for China to hold US dollar assets and risk capital losses on the country’s foreign-exchange reserves;

·         Eventual status as one of the world’s major reserve currencies, which would provide China more freedom to maneuver in domestic and international economic policy.

China’s enthusiasm for RMB internationalization since 2009 partly reflects its frustration with the lack of progress in reforming the international financial architecture, and with the state of regional financial cooperation. Chinese officials believe that RMB internationalization is a way for China to set its own agenda without being overly constrained by external conditions beyond its control.

Thus far, China has made significant progress in the use of the RMB as a settlement currency, in the issuance of RMB-denominated bonds, and in signing currency-swap agreements with foreign central banks. RMB deposits in Hong Kong are growing exponentially.

Despite these achievements, however, RMB internationalization could still easily go awry. For example, various incentives have been provided to encourage enterprises to use the RMB to settle transactions. But, with an undervalued exchange rate and strong expectations for the RMB to appreciate in the future, foreign importers of Chinese products refuse to use the RMB to settle transactions, while foreign exporters are happy to accept RMB. As a result, even with the same trade balance, China ends up with more foreign-exchange reserves, though using the RMB as a settlement currency is supposed to reduce their accumulation.

Indeed, so far, RMB internationalization has shown a clear pattern of asymmetry – and not only as a settlement currency for China’s imports, but not for exports. RMB-denominated bonds meet strong demand, yet non-residents have no great incentive to issue them. And, while foreign lenders are happy to extend RMB loans, they are not welcome by foreign borrowers. Given strong expectations of RMB appreciation, internationalization will inevitably lead to a serious currency mismatch, with possibly detrimental consequences for China’s welfare.

A more fundamental problem for RMB internationalization is what it implies for China’s capital controls. Although the internationalization of a currency is not tantamount to capital-account liberalization, the degree of internationalization is conditional on capital-account liberalization. In fact, internationalization of the RMB has opened a new hole in China’s wall of capital controls. The big increase in RMB deposits in Hong Kong is a case in point.

When a currency endures a prolonged process of one-way appreciation, speculative capital aimed at exchange-rate arbitrage is bound to seek all chances to flow in.

Hot money will increase currency appreciation pressure and complicate macroeconomic management. The profit-taking by speculators at the end of the game will lead to huge welfare losses to the recipient country, in this case China.

Fear of hot money was the main reason why China refused to de-peg the RMB from the dollar until July 2005. While China did decide to allow the RMB to appreciate gradually after that, it has relied on capital controls to prevent hot money from flowing in. The controls are leaky, to be sure, but they have worked (so far), which is why China has effectively maintained macroeconomic stability over the years.

The key objective of China’s capital controls is to prevent non-residents from holding domestic RMB-denominated assets that are unrelated to trade and long-term capital flows. But RMB internationalization encourages non-residents to hold more RMBs and RMB-denominated assets. As a result of RMB internationalization, RMB deposits held by Hong Kong residents have reached RMB370 billion ($57 billion), and the amount may reach
1 trillion
by the end of the year.

One might wonder what difference there is between hot money and RMB deposits held by non-residents. The answer depends on why non-residents hold these deposits. The attraction of the RMB should come from China’s strong economic fundamentals and faith in its economy. If it comes from expectations of RMB appreciation, the success of RMB internationalization can be easily reversed and will cause more problems for China’s monetary authority to solve in the future.

Fortunately, China’s monetary authority has already noticed the subtlety of the distinction between legitimate demand for RMB-denominated assets and hot money. This means that the pace of RMB internationalization could become more measured than international investors have expected.

While internationalization of the RMB is necessary (and inevitable), it should be guided by market principles and pursued in a cautious manner. To get the sequence of policy adjustments right is vital. In any case, the RMB’s path to becoming a truly international currency promises to be a bumpy one.

Yu Yongding, currently President of the China Society of World Economics, is a former member of the monetary policy committee of the Peoples' Bank of China and former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.

Extrait de : Rio eyes switch from US dollars to the yuan , Matt Chambers and Glenda Korporaal , The Australian, June 04, 2011

IN another sign of China's growing power in world markets, the world's third-largest miner is openly canvassing switching its iron ore settlements from US dollars to the Chinese yuan as China buys more iron ore and pressure grows to trade in the national currency.

Rio Tinto iron ore chief Sam Walsh said yesterday that the issue had been raised by many of the company's Chinese customers at recent meetings in Beijing.

"For us, it's a complex issue because our financing is in US dollars and trading in US dollars acts as a natural hedge, but it's certainly something we will be looking at and studying," Mr Walsh told a business lunch in Melbourne.

"We don't have any initial plans . . . for us, having that currency hedge is an important element of financing and protecting our business."

China is trying to develop a deep market in offshore yuan, or renminbi (RMB), to pave the way for a free float of the currency. An official offshore RMB market, launched in August last year, is now worth $65 billion and HSBC predicts it could reach $130bn by year's end.

HSBC Australia economist Paul Bloxham welcomed Mr Walsh's comments.

"It makes a great deal of sense that companies trading directly with China start to use the renminbi, rather than a third-party currency like the US dollar, to settle trade."

HSBC predicts that, within the next three to five years, half of China's foreign trade with emerging countries will be settled in renminbi, making it one of the top three trading currencies in the world.

"This will be a big deal . . . one quarter of Australia's exports go to China," he said.

HSBC Australia chief executive Paolo Maia said a growing number of corporate clients in Australia were "seeking to work with Chinese trading partners in renminbi, not only to minimise foreign exchange risk but also to improve their pricing and trading terms".

"We expect this trend to accelerate. With over half the value of our trade now accounted for by resources, increased usage of renminbi in commodities trade will be very significant for Australia."

While it is understood that BHP Billiton has no plans to negotiate its trade with China in yuan, there are signs that Beijing welcomes the growth in yuan-denominated trade.

Mr Walsh said the matter had been raised by Chinese Vice-President Li Keqiang, a sign of Beijing's attention to the issue.