Over the past few months, I've covered Chinese authorities promoting the yuan as an aforesaid vehicle currency for trade settlement with its near neighbours and those farther afield. Consider Southeast Asia--Singapore in particular--and London. After establishing the RMB in its backyard, the world beckons. However, a recent this recent article suggests things are not quite going according to plan in certain respects. While RMB-denominated trade settlement volume has gone up, it has mainly been importers, not exporters, who've been interested in the scheme. Instead of slowing dollar reserve accumulation as intended, the programme is said to have made China's reserve stash even larger since importers do not need greenbacks to settle their transactions, making dollars pile up domestically. Worse still, the programme is said to encourage "hot money" inflows from those keen on comparatively high PRC interest rates or (inevitable?) yuan appreciation.
Let's begin with importers, not exporters, cottoning up to this programme:
It also has boosted, rather than reduced, the amount of foreign-exchange reserves piling up in China's coffers—the opposite of what Beijing intended when it opened the yuan for foreign trade...Thinking of how devaluation is built into US dollars, after all, why should foreign buyers be keen on paying off their Chinese counterparts in yuan which faces the opposite dynamic? Pardon the pun, but yuan to keep RMB and lose the Benjamins:
On Tuesday, the People's Bank of China said foreign-exchange reserves jumped by $153 billion in the second quarter to $3.2 trillion. Of that increase, $48 billion, or about a third, was attributable to China's decision to allow the yuan to be used in foreign-trade transactions, estimates Zhu Chaoping, head of research at ChinaScope Financial, a market-research firm in Hong Kong. In the prior two quarters, the trade program added a total of $83.5 billion to China's reserves, Mr. Zhu calculates.
Nearly 90% of cross-border trade settled in yuan in the first quarter—totaling 360.3 billion yuan, or 7% of China's total trade—involved China's imports, according to data provided by the People's Bank of China...
The fact that importers are using yuan means that dollars build up at a more rapid clip in the Peoples Bank of China's vaults because importers don't need to tap them. "Everyone thinks there is a one-way bet on which way the currency will move," so only those that get paid in yuan are interested in the business, says University of California at Berkeley economist Barry Eichengreen. "When you internationalize, you can't control all the uses to which money is put."
But the story gets worse since firms able to participate in this programme may have their sights set on arbitrage opportunities rather than helping internationalize the yuan as intended by obtaining the currency at more favourable exchange rates and holding on to it for longer to take advantage of the aforementioned higher interest rates on the mainland:Right...back to the drawing board, then. The mechanics of the current programme may have undesirable consequences that require fine-tuning. Still it's a noble objective--weaning off the world from a currency that, alike its principal unprincipled issuer, has no compunction about letting it slide to heaven knows where. All the while while yakking about "strong dollar" policy on a journey to the American poorhouse.
Some companies also have used the trade-settlement program to profit from the difference between higher yuan interest rates in mainland China and lower U.S. dollar rates in Hong Kong, according to bankers and analysts. Such transactions could be used by speculators betting on the yuan's rise and have the potential effect of adding to China's dollar reserves.
For now, China's central bank is struggling to keep up with companies looking to use the internationalization program as a channel for so-called hot money, which can contribute to dangerous bubbles in China's real-estate market and stock exchanges, as investors look to park their money in sectors seen as paying a high return. The State Administration of Foreign Exchange, the central bank's currency watchdog, has put in place a "special campaign" to crack down on speculative money flows.
Delaying payments for imports is a long-used tactic by Chinese companies to benefit from yuan appreciation. Experts on China's foreign-exchange regulations say the availability of yuan settlement has the potential to make this form of arbitrage even more profitable, because companies now have access to even more favorable yuan exchange rates overseas. The yuan is valued slightly more against the U.S. dollar in Hong Kong than it is on the mainland.