♠ Posted by Emmanuel in China,Currencies
at 1/17/2011 12:10:00 AM
A couple of years ago during the height of the energy price rises, Venezuelan President Hugo Chavez made a widely-commented PR stunt by making the now Venezuelan government-majority owned firm CITGO sell discounted heating oil to disadvantaged Americans, the implication being that Hugo Chavez cared more about poor Americans than George W. Bush. In the run-up to President Hu Jintao visiting Washington DC on an official visit, we have arguably the same phenomenon at work. However, instead of the greedy energy industry and its favoured politicians, US currency debauchery is firmly in China's crosshairs this time around. Read on...The ever-reliable Wall Street Journal has had a brace of informative articles lately on how China is relaxing controls on the foreign availability of its currency, the reniminbi AKA the yuan. Anyone who's taken an economics course knows that the three roles of currency are as medium of exchange, store of value, and unit of account. In the past few years, China has been promoting the yuan as a medium of exchange in international trade by extending swaps to Southeast Asian countries, among others, to facilitate the use of RMB in trade. Now, it appears the Chinese are also moving along on the store of value front by allowing state-owned overseas banking subsidiaries to open RMB-denominated accounts for overseas retail and commercial banking clients:
China has launched trading in its currency in the U.S. for the first time, an explicit endorsement by Beijing of the fast-growing market in the yuan and a significant step in the country's plan to foster global trading in its currency. The state-controlled Bank of China Ltd. is allowing customers to trade the yuan, also known as the renminbi, in the U.S., expanding the nascent offshore market for the currency which began last year in Hong Kong.Before moving to the next story, do note that the medium of exchange function is proceeding along nicely as well, with more and more China firms accepting yuan as payment during trade settlement:
The decision is the latest move by China to allow the yuan, whose value is still tightly controlled by the government, to become an international currency that can be used for trade and investment. "We're preparing for the day when renminbi becomes fully convertible," Li Xiaojing, general manager of Bank of China's New York branch, told The Wall Street Journal. He said the bank's goal is to become "the renminbi clearing center in America."
Until the middle of last year, the buying and selling of yuan had largely been confined to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million...
While businesses and individuals in the U.S. can already trade yuan through Western banks such as HSBC Holdings PLC, the move by a Chinese-owned bank marks a stamp of approval by China on the expansion in yuan trading. Bank of China, which is 70%-owned by the government, now allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches.
Bank of China limits the amount of yuan that can be converted by a U.S.-based individual customer to up to $4,000 a day [and $20,000 annually as per the next article]. The restriction is designed to fend off speculation in the currency, bank officials say. But there is no limit, at least for now, on the amount that can be converted by businesses, so long as they are engaged in international trading. The bank has no restrictions on the ability by U.S.-based customers to convert the yuan back into dollars.
Chinese regulators last month increased the number of exporters that can use the yuan to settle international transactions from a few hundred to nearly 70,000. Some analysts have predicted that it will be only a few years before 20% to 30% of China's $2.3 trillion in imports could be conducted in yuan rather than dollars. Today, less than 1% is done in yuan, according to London's Standard Chartered Bank. While offshore yuan trading has grown rapidly, it's still a fraction of the $4 trillion daily trading in currency markets world-wide and pales next to trading in the dollar, yen, euro and other currencies.Simply put, it fits with general expectations of China moving to a fully convertible currency in a few years' time. Certainly, bellyaching Yanks can't complain. Now we get to a really fun personal interest article from the WSJ that gives reasons--nay--implores (smart) Americans to ditch their greenbacks for the currency of the future. Five reasons are given for doing so excerpted here:
- First, it's very unlikely to go down. Of how many investments can you say that? The yuan has very little room to fall farther because it is already seriously undervalued. Beijing has spent hundreds of billions of dollars keeping the currency artificially cheap for years to boost exports.
- Second, it's very likely to go up. Why? China is growing rapidly, is a manufacturing powerhouse and is running an enormous trade surplus. Countries like that usually have very strong currencies. Think of the Japanese yen, or the old German Deutsche mark.
- The third reason for holding some money in yuan: What else are you going to do with it? Interest rates elsewhere are minimal, so you won't be missing out on much. According to Bankrate.com, the highest-yielding six-month certificate of deposit pays just 1.3%, before taxes. The dividend yield on the stock market is 1.7%. You can earn better yields from government bonds—the 10-year Treasury is paying 3.3%—but that's also subject to federal taxes, and you can put yourself at risk from inflation.
- The fourth argument for a yuan account: It makes you more diversified. That's the holy grail of investing. The yuan-dollar exchange rate probably has little, if any, correlation to any other asset in your portfolio. (As a bet against the dollar, it might have some correlation to gold.) The exchange rate between the renminbi and the dollar will follow its own path. This is unlikely to be dictated much, if at all, by developments in stocks or even bonds.
- The fifth and final argument for holding Chinese currency: It may help you offset the costs of U.S. economic decline. Our share of the world economy, which was 24% a decade ago, is this year expected to sink below 20%—the lowest figure in modern times. We are running a current account deficit of 3.5% of gross domestic product. Our national debt has nearly tripled in a decade, and deficits stretch out as far as the eye can see. Will the greenback survive as the world's reserve currency? Why should it? The British pound didn't.
It's an excellent way of showing up American economic mismanagement--the Chinese indeed offer Americans a better bargain than their own easy money enthusiasts who've helped make the United States an economic cesspool and global laughingstock. If Hugo can do it, trillion dollar man Hu can too.
