Saturday 26 September 2009
Fall and rise of the renminbi: ‘people’s currency’ rides out downturn to become a global powerhouse
Thanks to rapid economic growth in recent decades and the fact China has emerged relatively unscathed from the economic downturn, the renminbi’s purchasing power has strengthened, as has its ability to resist sudden fluctuations.
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Fall and rise of the renminbi: ‘people’s currency’ rides out downturn to become a global powerhouse
Al Guo
25 September 2009
Beijing resident Yang Zhen was amazed when during a trip to Vietnam this year a fruit dealer preferred to receive yuan instead of the local dong.
“She even offered me a discount if I paid in renminbi,” Yang said.
Thanks to rapid economic growth in recent decades and the fact China has emerged relatively unscathed from the economic downturn, the renminbi’s purchasing power has strengthened, as has its ability to resist sudden fluctuations.
In Hong Kong and some Southeast Asian countries, shop owners have long provided mainland tourists with the option of paying in yuan, as it has risen steadily against the US dollar since late 2005.
Mainland authorities launched a pilot scheme in July to use the yuan for trade settlement in some countries, and a senior banking official was appointed to head a task force to exploit the renminbi’s potential as an international trade tool.
The evolution of renminbi, issued shortly before the establishment of the People’s Republic in 1949, is as astonishing as the economic growth that has taken place in the past two decades.
The People’s Bank of China was established in December 1948, and former state leader Ren Bishi was appointed to oversee the design and circulation of the new currency. Paramount leader Mao Zedong asked for the currency to be named “renminbi”, meaning “the people’s currency”.
From 1948 to 1953, banknotes from 1 to 50,000 yuan were issued on the mainland. One yuan is now worth HK$1.14, but not back then. Low-ranking military officials received a monthly salary of about 150,000 yuan in the early 1950s, but they had to spend about 130,000 yuan on basic food and daily necessities.
The bank issued a second set of renminbi in 1955 to replace old currency, at a rate of 1 for 10,000 yuan. A third set was issued from 1962 to 1974, with a face value ranging from 1 fen to 10 yuan.
The central bank started to issue fourth-generation renminbi in 1987, highlighted by the re-emergence of 50- and 100-yuan notes, which were called back into circulation to cope with inflation.
While the fourth-generation currency was in use, the mainland government for the first time issued an official exchange rate for important foreign currencies such as the US dollar. From a rate of 2.8 yuan to the US dollar at the start of 1985, the yuan depreciated until hitting a low of 8.7 yuan to the US dollar in early 1994.
The sharp depreciation greatly helped the growth of exports. The low value of the currency, plus a huge and inexpensive labour force, rapidly turned the mainland into one of the world’s factories. Many Western multinationals started to move their manufacturing bases from Southeast Asian countries and other parts of the world to the mainland, a trend some market watchers blamed as a contributing factor to the Asian financial crisis in 1997.
The government issued the fifth-generation of the currency in 1999 to celebrate the 50th anniversary of the founding of the People’s Republic.
After the unexpected surge of the export sector in the late 1990s, US trade officials began to accuse Beijing of deliberately undervaluing the yuan to gain unfair trade advantages. The war of words escalated during US president George W. Bush’s second term, and the United States threatened to take punitive measures if China refused to allow the value of its currency to appreciate.
Under that pressure, the central government announced it would float its currency at a higher rate from July 2005. From what was then 8.11 yuan to the US dollar, the currency has steadily appreciated to about 6.84 yuan to the US dollar, a rise of almost 16 per cent.
The currency quarrel between the two governments suddenly calmed when the global financial crisis began. Many market watchers have started to talk about the potential of the renminbi becoming a world currency, because of the stability of the mainland’s economy.
A series of moves by the central government after the financial crisis only reinforced the talk. They signed currency-swap agreements with many Asian and South American countries, while allowing five mainland cities to try to settle some foreign trade deals in yuan.
Premier Wen Jiabao appeared to be trying to cool the talk while at a financial meeting in Dalian this month.
He said the status of the renminbi had been enhanced on the global market, but it was only convertible under trade accounts, not under capital accounts. “We need to have a correct view of ourselves when pushing forward the internationalisation of the renminbi,” the premier said.
Zhao Xijun, a finance professor at Beijing’s Renmin University, said China’s moves to internationalise the renminbi thus far were just baby steps. “First of all, the government has to add more cities to the pilot programme” in allowing them to settle trade with yuan, Zhao said. “Then, the government has to gradually open the financial market to at least partly allow the free flow of the Chinese currency. Otherwise, there is no point in foreign trade partners taking the yuan as an investable currency.”
Zhao estimated it could take the mainland up to two decades to turn thoughts of reforming the currency system into reality.
“So it’s still too early to talk up the yuan as a world currency at the current stage,” he said.
December 1, 1948: The People’s Bank of China, registered in Shijiazhuang, Hebei province, issues the first set of renminbi. It contains 12 denominations from one yuan to 50,000 yuan, and can be used anywhere in China except Taiwan and Tibet. Previously, different areas of the country used different currencies.
March 1, 1955: The People’s Bank of China recalls the first set after complaints about its printing quality and large denominations. The second set is valued at a ratio of 1:10,000 of the first set. It includes 16 denominations from one fen to 10 yuan. In 1957, coins of one, two and five fen are issued. To prevent counterfeits, the bank later issues better quality notes, printed in the Soviet Union, of three, five and 10 yuan.
April 20, 1962: Another set of renminbi is released. It has 13 denominations and the same value as the previous set, so that both sets can be used in the market at the same time.
April 27, 1987: The bank launches the fourth set of renminbi that features 11 denominations from one yuan to 100 yuan.
October 1, 1999: This set features six denominations, each note carrying a portrait of Mao Zedong and more than 20 security features. To allow people to distinguish the notes, the denominations are bigger and show both Arabic numbers and Chinese characters. The notes are shorter in length than the previous set. Twenty-fen and two-yuan notes are scrapped and 20-yuan notes are introduced because the price of goods has risen over time. In 2005, a renewed version of these notes is issued. The design remains the same but the security features and printing quality are improved.
Source: Xinhua
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