This holiday season has been quite active on the IPE front; enough to keep me on my toes. No sooner did some journalists pooh-pooh China's attempts to revitalize the yuan and I too cast doubt on Arvind Subramanian's idea that the yuan would become the world's dominant currency by 2021 that we come across news that China is redoubling its efforts in internationalizing its currency. They are small moves, yes, but this pattern of gradual experimentation should not be dismissed. After all, this formula appears to have taken China from its pre-1979 state to being the world's second largest economy outright.In any event, the main headline of the hour is of the Japanese PM Yoshihiko Noda travelling to Beijing over Christmas and signing up to an agreement to use renminbi and yen more extensively in the two countries' trade and investment relations as opposed to the US dollar with its built-in depreciation feature for those dumb enough to traffic in that riffraff:
The two Asian economies said that they wanted to reduce costs and risks for their companies – an implicit call for less reliance on the dollar, which is currently their predominant medium of exchange.That said, there are substantial issues concerning where the likes of Japan can park their RMB given that China's capital account is closed:
Analysts said the agreement could help boost the renminbi’s role in Asia and internationally but that it was only one of the many tiny steps that Beijing has taken to elevate its currency’s status and that the dollar’s position as the world’s premiere reserve currency was safe for now.
The key obstacle to promoting such trade has been China’s reluctance to relax controls on its capital account, meaning that foreign companies that receive its currency have nowhere to invest it apart from the offshore renminbi base of Hong Kong.Unfortunately alike many others Uncle Sam makes miserable, my country's forex reserves are held mostly in dollars, rendering Treasuries' "store of value" a running gag America plays at the expense of other nations including its so-called friends. (And with a friend like Sammy...) So it comes as a bit of a surprise that erstwhile staunch US "ally" Japan is now trumpeting how it is accumulating PRC sovereign debt--starting with $10 billion worth of real securities instead of helicopter-dropped American pieces of paper:
Liang Meng, a researcher with the People’s Bank of China, acknowledged that the vow to settle more trade in renminbi would by itself change little. “It’s not like the unimpeded global flows of the dollar. To invest in China, you still have to go through intermediary channels,” he said in the commerce ministry’s newspaper.
Japan also sought to downplay its plan to purchase up to $10bn of Chinese government bonds. An unnamed Japanese official was quoted in Chinese media as saying that this was an expression of economic co-operation, not an attempt at diversification of its foreign exchange reserves. [Yeah sure, and I'm sure they're firm believers in "strong dollar" policy too (nudge, nudge, wink, wink).]So much for that TPP feint. Made to choose between closer economic ties between the US and China, Japan sensibly goes for the rising power. As Depeche Mode once noted, everything counts in large amounts in moving towards a non-dollar centric world. The handshake seals the contract; from the contract there's no turning back. etc. I believe it's time others in the region copied Japan's example and made similar goodwill visits to Beijing--where the money is nowadays--to procure reserves denominated in real (RMB), not play (USD) money.
Over the past five days, China has also signed currency agreements with Thailand and Pakistan, opening bilateral swap lines worth Rmb70bn and Rmb10bn, respectively. “These are all little parts of the bigger picture of trying to internationalise the renminbi,” said Ken Peng, an economist with BNP Paribas.
That settles it; my New Year's resolution is to petition our central bank authorities to swap dollar-denominated detritus in our reserves for the people's money. If there's something that unites all persons, it's the wish that they not be shafted time and again by the likes of helicopter droppers, liars by profession, and mathlexics.
UPDATE: The WSJ has more on the mechanics of this trade. As anyone who has traded forex knows, all basic exchange rates (USD/RMB, GBP/USD, etc.) must have the dollar in there somewhere, making it obligatory to transact by referencing USD. However, the Japan-China deal aims to bypass having to deal with dollars altogether:
[...]China and Japan announced a series of deals that promote the use of the yuan in trade and investment between the world's second- and third-largest economies, which would limit somewhat the use of the dollar in Asia, the world's fastest growing region. Specifically, the two countries agreed to promote direct yuan-yen trade, rather than converting their currencies first to dollars, and also for Japan to hold yuan in its foreign-exchange reserves, which are now largely denominated in dollars.Also notable is how Hong Kong, the entrepot chosen for yuan liberalization, is becoming even more of a hub for currency exchange due to China making it an offshore centre for the RMB:
So far, China has taken some incremental steps toward setting the yuan free. Hong Kong, the only place outside mainland China where the yuan can trade freely, has become the world's fastest-growing currency market in the world.Nearly a tenth of all trade with the PRC is now settled in RMB compared to nearly nothing the year before:
The most significant measure China has taken so far is allowing cross-border trade to be invoiced and paid in its currency. Yuan-settled trade now accounts for about 10% of China's total trade, compared with less than 1% a year ago. Analysts at Deutsche Bank AG predict that yuan-settled trade would amount to 3.7 trillion yuan next year, or 15% of China's total trade.So the RMB really is gaining substantial ground, unbeknownst to many.
