Yen for yuan policy is the usual yawn

PUBLISHED : Thursday, 31 May, 2012, 12:00am
UPDATED : Thursday, 31 May, 2012, 12:00am


Beijing has authorised direct trading between the yuan and Japan's yen - only the second currency after the US dollar to have such an arrangement - as part of a push to internationalise the yuan to become widely used in trade, investment and reserves.

SCMP, May 30

It seems every few days now that we prominently feature some new declaration from Beijing about how China is freeing up the yuan to make it a more international currency.

But look a little more closely and each time it is just a tiny little nibble or no more than a sniff at the appetizer. Yesterday's announcement was a good example. Beijing will allow direct cross-trading between the yuan and the yen by officially approved parties, instead of forcing them to use the US dollar as a catalyst.

Big deal. They could do it anyway, and if that meant having to do it off-screen, well, the margins are bigger off-screen than they are on-screen.

What we have here is a classic case of wanting to have your cake and eat it too. Beijing wants all the benefits of an open currency, with central banks and private investors around the world happy to hold it and invest in instruments denominated in it.

At the same time, Beijing does not want to give up control of investment allocation in its domestic market. It still wants to restrict where the general public can put its savings and it still wants to tell the designated institutions for these savings where they must invest the money.

Surrendering this close financial control is no small matter. What the authorities would be telling the world by doing so is revolutionary. They would effectively be saying: 'We have finally and completely given up on communist ideology. This is the official end of a failed experiment that began in 1949. In future, please treat the appearance of Mao Zedong's face on our banknotes as a joke. We have officially embraced capitalism.'

And, of course, they don't want to say it. It would be the biggest loss of face for a government of China since Genghis Khan galloped in.

So instead, they make regular little pretences of giving up control here and there, to create the impression they are inexorably on their way to creating an open currency, while remaining reluctant to throw the keys to the prisoner so he can unlock his leg irons.

How do I define unlocking those leg irons? Simple. That's when the man on the street in the smallest town in Xinjiang can direct his local bank to exchange his yuan for euros and transfer the funds to an account in Bermuda for payment on a Spanish stock he has just bought on the web.

When this becomes possible without the requirement of official permits, Beijing will no longer be able to tell any financial institution in China where to put its money. If it tries to do so, that institution's depositors will simply flee elsewhere, abroad if necessary.

The People's Bank of China will still be able to conduct monetary policy and the central government will still be able to raise taxes, but money will find its own price and its own exchange rates. If the Ministry of Railways then wants to raise money for more needless high-speed lines, it may discover that its bonds suddenly have a junk rating. The money won't be wasted after all.

The other benefits of introducing proper respect for money this way would be enormous. For one, the world's biggest manufacturing centre would find it could properly price its initiatives in its own domestic currency, at last. It would be on its way to creating new world-renowned brand names rather than always working for foreigners.

The central bank will also no longer find itself under constant pressure to soak up the resources of the economy in order to build up foreign reserves that now stand at a jaw-dropping US$3.3 trillion. Common sense will rule. Why fund American wars when the money can be used for necessary imports?

There is only one drawback. Some important people in Beijing will lose authority and, more significantly, lose face.

I suppose that this is too big a price to pay. We cannot really expect it. We shall just have to continue with cosmetic changes that pretend to be real surgery, and that do nothing but further widen income polarity on the mainland.

What a shame.