A shift from US dollar to yuan as the world currency would have significant consequences
By DON LEE 7 April 2009
Could the world’s currency of choice have the face of Mao Zedong on it, not George Washington’s? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalise the yuan and promote its influence overseas, with Shanghai designated as command central.
Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to make payments for Chinese exports in yuan, bypassing the dollar - the currency that dominates international trade and finance, including foreign exchange reserves.
Beijing is also taking initiatives to use the yuan, also known as the renminbi, to settle trade accounts between some Chinese provinces and neighbouring states, starting with Hong Kong.
‘The central bank has set promoting the renminbi for payment settlements as the main task for this year’s work,’ said Shi Lei, an analyst in the global financial markets section at Bank of China in Beijing.
China is also spreading the yuan’s influence in the Asian region by making loans and investments in other countries, as well as through its many tourists who are carrying loads of Chinese currency in their pockets. In Cambodia, where the US dollar has long dominated, a tour guide in Angkor Wat recently asked visitors whether he could be paid in Chinese yuan.
Meanwhile, Chinese officials have called attention to the risks of an international monetary system that relies on the dollar, which many analysts see as unstable because of heavy deficit spending by Washington to combat the recession.
Still, Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group, said: ‘I think these are very, very shrewd moves’ by the Chinese. ‘The timing is really good.’
Mr. Daley and other experts say it will take years for the yuan to supplant the dollar; the Chinese currency is currently tightly controlled and not even freely tradable in international markets. It will take time for the yuan to gain international acceptance and for China to reform its capital markets and diversify its economy, critical preconditions before the Chinese can elevate its currency to rival the dollar.
But given the high risk of inflation diminishing the value of the dollar, and neither the euro nor the Japanese yen viewed as attractive alternatives, Chinese and Western analysts say they can envision the yuan becoming the dominant currency by 2020.
That’s when Beijing expects the yuan will have been fully liberalised, institutional arrangements and rules set, and Shanghai firmly established as an international financial centre.
‘That’s a reasonable timetable,’ said Tim Condon, chief Asia economist for ING Financial Markets in Singapore, adding that the outlooks for the US and Chinese currencies are in the opposite directions. ‘I see undesirable risk against the dollar and appreciation pressure on the Chinese yuan.’
For the Chinese, that’s not necessarily a good thing at the moment. China holds a stockpile of about US$2 trillion of foreign exchange reserves, about half in US Treasury bonds and other US-government- backed debt. Beijing is worried that the dollar will weaken and erode the value of those investments. Yet any sudden or large move to shift those funds could destabilise the dollar and hurt Chinese interests.
At the same time, the yuan is widely thought to be undervalued.
American manufacturers and politicians have long complained that China manipulates its currency to boost exports. By keeping the yuan’s value artificially low, critics say, Chinese manufacturers can sell their goods more cheaply in overseas markets. If the exchange rate - currently pegged at 6.8 yuan to US$1 - was not tightly set by Beijing, even Chinese analysts figure the ratio could drop to five yuan to the dollar.
Given China’s heavy reliance on trade and related investments for its economic growth, Beijing can’t afford to let the yuan appreciate too quickly. To reduce those risks, it needs time to continue to grow its economy and transfer more of its economic output to services and the domestic sector.
A shift from the dollar to the yuan as the global currency would have significant practical and symbolic consequences. The dominance of the dollar in trade, financing tools, commodity pricing and international payments has given the United States a big advantage in driving commerce and funding the running of the country, although that’s also allowed Americans to spend more than it produces and saves.
Psychologically, the unseating of the dollar would be akin to America losing its stature as the world’s supreme economic power.
Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, cautions against getting too excited about the Chinese government’s recent moves, including the Cabinet’s announcement last week that Shanghai would be built into an international finance hub.
He says there’s a long way to go before the yuan can become an international currency.
At the moment, the yuan, which has a picture of Mao on every note, is traded in the open market in only a handful of small countries, such as Romania. ‘It’s not so meaningful to talk about this right now when the renminbi is not yet convertible,’ Mr. Yi said. -- LAT-WP
1 comment:
China slowly moving to globalise the yuan
A shift from US dollar to yuan as the world currency would have significant consequences
By DON LEE
7 April 2009
Could the world’s currency of choice have the face of Mao Zedong on it, not George Washington’s? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalise the yuan and promote its influence overseas, with Shanghai designated as command central.
Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to make payments for Chinese exports in yuan, bypassing the dollar - the currency that dominates international trade and finance, including foreign exchange reserves.
Beijing is also taking initiatives to use the yuan, also known as the renminbi, to settle trade accounts between some Chinese provinces and neighbouring states, starting with Hong Kong.
‘The central bank has set promoting the renminbi for payment settlements as the main task for this year’s work,’ said Shi Lei, an analyst in the global financial markets section at Bank of China in Beijing.
China is also spreading the yuan’s influence in the Asian region by making loans and investments in other countries, as well as through its many tourists who are carrying loads of Chinese currency in their pockets. In Cambodia, where the US dollar has long dominated, a tour guide in Angkor Wat recently asked visitors whether he could be paid in Chinese yuan.
Meanwhile, Chinese officials have called attention to the risks of an international monetary system that relies on the dollar, which many analysts see as unstable because of heavy deficit spending by Washington to combat the recession.
Still, Kirby Daley, a strategist in Hong Kong for brokerage Newedge Group, said: ‘I think these are very, very shrewd moves’ by the Chinese. ‘The timing is really good.’
Mr. Daley and other experts say it will take years for the yuan to supplant the dollar; the Chinese currency is currently tightly controlled and not even freely tradable in international markets. It will take time for the yuan to gain international acceptance and for China to reform its capital markets and diversify its economy, critical preconditions before the Chinese can elevate its currency to rival the dollar.
But given the high risk of inflation diminishing the value of the dollar, and neither the euro nor the Japanese yen viewed as attractive alternatives, Chinese and Western analysts say they can envision the yuan becoming the dominant currency by 2020.
That’s when Beijing expects the yuan will have been fully liberalised, institutional arrangements and rules set, and Shanghai firmly established as an international financial centre.
‘That’s a reasonable timetable,’ said Tim Condon, chief Asia economist for ING Financial Markets in Singapore, adding that the outlooks for the US and Chinese currencies are in the opposite directions. ‘I see undesirable risk against the dollar and appreciation pressure on the Chinese yuan.’
For the Chinese, that’s not necessarily a good thing at the moment. China holds a stockpile of about US$2 trillion of foreign exchange reserves, about half in US Treasury bonds and other US-government- backed debt. Beijing is worried that the dollar will weaken and erode the value of those investments. Yet any sudden or large move to shift those funds could destabilise the dollar and hurt Chinese interests.
At the same time, the yuan is widely thought to be undervalued.
American manufacturers and politicians have long complained that China manipulates its currency to boost exports. By keeping the yuan’s value artificially low, critics say, Chinese manufacturers can sell their goods more cheaply in overseas markets. If the exchange rate - currently pegged at 6.8 yuan to US$1 - was not tightly set by Beijing, even Chinese analysts figure the ratio could drop to five yuan to the dollar.
Given China’s heavy reliance on trade and related investments for its economic growth, Beijing can’t afford to let the yuan appreciate too quickly. To reduce those risks, it needs time to continue to grow its economy and transfer more of its economic output to services and the domestic sector.
A shift from the dollar to the yuan as the global currency would have significant practical and symbolic consequences. The dominance of the dollar in trade, financing tools, commodity pricing and international payments has given the United States a big advantage in driving commerce and funding the running of the country, although that’s also allowed Americans to spend more than it produces and saves.
Psychologically, the unseating of the dollar would be akin to America losing its stature as the world’s supreme economic power.
Yi Xianrong, a researcher at the Chinese Academy of Social Sciences, cautions against getting too excited about the Chinese government’s recent moves, including the Cabinet’s announcement last week that Shanghai would be built into an international finance hub.
He says there’s a long way to go before the yuan can become an international currency.
At the moment, the yuan, which has a picture of Mao on every note, is traded in the open market in only a handful of small countries, such as Romania. ‘It’s not so meaningful to talk about this right now when the renminbi is not yet convertible,’ Mr. Yi said. -- LAT-WP
Post a Comment