Yuan Regional Trade? SE Asia Now Can Use RMB

♠ Posted by Emmanuel in ,, at 12/20/2009 12:11:00 PM
Now the game is truly on in contesting regional hegemony in the Asia-Pacific region. Formerly the bailiwick of the United States, unresolved conflicts that are not going well in the Middle East and South Asia have perhaps distracted it from conducting diplomacy there--particularly Southeast Asia. At about this same time last year, China announced that it would begin allowing the use of its own currency for trade facilitation with its territories Hong Kong and Macau as well as ASEAN on a trial basis. To be sure, the yuan (renminbi or RMB) has its share of advantages and disadvantages as a currency in terms of a currency's three traditional functions.

If you will recall, these are money as a store of value, medium of exchange, and unit of account. Store of value deals with a currency holding its value over time. Compared to some other currencies in the region, the yuan has held its value better, making it a somewhat more attractive proposition to hold. Medium of exchange deals with a currency being readily exchanged. Of course, the yuan is not readily used in foreign exchange or international transactions at the moment, although the process of experimenting with trade facilitation should be interesting to watch. Last, a unit of account in trade terms simply means it being divisible in various denominations.

China eventually making its currency readily exchangeable (or even free floating) is predicated on making small steps such as what it is doing now with ASEAN on a trial basis. The PRC is experimenting with offering regional partners RMB for trade facilitation to help gauge demand for this dollar alternative as a medium of exchange. Should the current effort prove to be popular, this role may eventually lead to RMB becoming a store of value as a reserve currency. Note that the process cannot be the other way around; first it must be readily traded before being considered as a possible reserve currency. After all, what use are reserves that cannot be used when needed? Given America's gargantuan future obligations and penchant for policies promoting dollar debasement, only a fool would rule out the RMB at least partially supplanting the dollar in the Asia-Pacific region.

Official PRC mouthpiece the People's Daily lays the groundwork for this story via the China-ASEAN FTA coming into force in 2010:
The Chinese currency yuan is expected to play a bigger role in regional trade as the China-ASEAN Free Trade Area (CAFTA) is to be realized on January 1 of 2010. "The upcoming CAFTA, which boasts the largest population among all the world's FTAs and allows zero-tariff on 90 percent of products traded between China and ASEAN, will quicken the process of RMB regionalization, "Xu Ningning, executive secretary general of China-ASEAN Business Council, told Xinhua at the 6th China-ASEAN Expo in Nanning, capital of Guangxi Zhuang Autonomous Region. Free trade demands free flow of currency, making possible the regional use of RMB, he said...

Alongkorn Ponlaboot, deputy minister of commerce of Thailand, believed RMB would play a more important role in bilateral trade between China and ASEAN in the future. He said yuan was a very stable currency and expanding its use could help reduce risks faced by the ASEAN countries in using the U.S. dollar, which has become highly volatile as a result of the global financial crisis.

Pung Kheav Se, general manager of Canadia Bank Plc. of Cambodia, echoed Thailand's deputy minister, saying trade between China and ASEAN kept growing and less risk by the use of RMB would benefit both sides.

Data from China's General Administration of Customs showed trade between China and ASEAN totaled 105.88 billion U.S. dollars in 2004, and rose to 231.07 billion U.S. dollars in 2008. China and ASEAN are currently the fourth largest trade partners to each other.

However, the use of yuan in ASEAN fell far short of the trade growth between China and ASEAN. Currently RMB settlement was mainly adopted in border trade which accounted for only 10 percent of the China-ASEAN bilateral trades, Teng Chong, board chairman of Guangxi Beibu Gulf Bank, told Xinhua...

Su Ning, vice governor of China's central bank, said financial cooperation between China and ASEAN was still at the initial phase and financial markets were not open enough. But potential for cooperation was huge as finance in China and ASEAN seeing fast development currently. China has been launching pilot RMB programs over the years, but the pace has obviously quickened since the onset of the global financial crisis as the U.S. dollar has been getting weaker, arousing concerns that an unstable dollar would lead to increased costs and risks for traders.

A Vietnamese furniture trading company named Vietnam Charity Trading Company Ltd. had attended the expo for five years. It began trades with China 22 years ago and has been exporting 70 percent of its products to China. The company buys materials from Laos and sells products to China and other countries, in which dollars, yuan and Vietnamese Dong are adopted. "That makes the process very complex and always results in losses because of the fluctuation of exchange rates," said Huang Yifan, executive director of the company.

"I really hope there is a single currency like the euro to cut off the cost of exchanging currency and make the whole process easier," she said. "I hope yuan could be the one as it has been stable and welcomed by the ASEAN people," she said, adding that yuan is very popular in Vietnam, Cambodia and Laos.

Grace See Choo, managing director of Grace Cosmetics, a Malaysian cosmetic company, said her company had been importing packing materials from China since 2000. "We always traded in yuan, which operates well," she said. "China is a huge market for us. Guangxi's market alone is larger than that in our whole country. We prefer yuan as the trading currency if the Chinese part want the same," She said. The company now is looking for a Chinese agent to explore Chinese market.

Although yuan had gained reputation among ASEAN people, efforts of the ten nations' central banks were still necessary to commit to a consensus of popularizing RMB, Teng Chong said.

Xu Ningning said new economic situation had created [a] stage in Asia for RMB. The three FTAs between ASEAN and China, Japan and the Republic of Korea, respectively, will build a wider platform for RMB exchanging. "Although it needs time to breed a new trade market or a new currency market, the CAFTA is believed to create new space for the regionalization of RMB," Xu said.
Inter alia, the Bank of China and the Hongkong Shanghai Bank have begun offering in RMB for China-ASEAN trade. A caution I need to add is the obvious one of the yuan being stuck at 6.83 to the dollar since the onset of the global financial crisis. While the yuan may be less volatile than some other regional currencies and may also be due for revaluation in the near future, its current shackling to dollar does not lend it any advantages against the greenback as a store of value. Still, that misses the point as China is more interested in exploring its use as a medium of exchange in intraregional trade at the moment.

In any event, it's a good start towards weaning the region away from Yankee-style Fritzl-nomics. May those responsible for it alike TIME's Person of the Year (and arch economolester) Ben Bernanke be doomed to a well-deserved ignominious end.