Foreign Exchange Market

How to nurture a blooming currency

PUBLISHED : Thursday, 20 October, 2011, 12:00am
UPDATED : Thursday, 20 October, 2011, 12:00am


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More often than ever before, people are talking about the renminbi.

As developed nations face fiscal problems, especially in Europe, where the euro is threatened by repeated sovereign debt crises, World Bank president Robert Zoellick says that 'in the next 15 to 20 years, China is well-positioned to join the ranks of the world's high-income countries'.

But exactly how much financial influence the mainland will have is a mystery - especially as to how the renminbi will be used by consumers and investors around the world.

Some international observers are even forecasting that the mainland will become an 'economic giant, financial midget' in the next 20 years.

For decades, one measurement of the economy's performance has been the usefulness of foreign money to China, rather than how the renminbi could find its place in the global arena.

In 1950, soon after the founding of the People's Republic, China's foreign exchange reserves were worth US$157 million, according to official figures.

But that total couldn't be maintained for long. In the 1960s, as a result of Mao Zedong's desperate and then disastrous social experimentation, dubbed the Great Leap Forward, the nation's foreign exchange reserves plummeted to less than US$50,000.

By contrast, as of June this year, the mainland held the world's largest amount of foreign currency reserves, valued at US$3.2 trillion, or more than 20,000 times its level in the 1950s.

The value of the renminbi, relative to the US dollar, has appreciated by close to 24 per cent since 1995, when Beijing started to pursue a de facto pegged exchange rate.

But it was not until 2009 that the renminbi began to have any exposure to the international market. Previously, in theory, all transactions between Chinese and foreign companies had to go through the People's Bank of China for exchanges and the settlements.

Then, in June 2009, Beijing began a pilot scheme to allow transactions to be made in renminbi. The scheme expanded, followed by agreements with a number of countries, most importantly Russia, to allow trade with those nations to be settled directly in yuan.

This was followed by the State Council's approval of Hong Kong's new role as the first cross-border yuan-settlement centre. There are now rumours in Beijing that Hong Kong will eventually be joined by Singapore and London.

Progress has been slow but steady in the increased use of yuan for offshore purchases. In June, ICBC Financial Leasing became the first mainland leasing company to pay for aircraft in yuan, when it ordered 42 Airbus 320 planes in a deal worth more than 20 billion yuan (HK$24.38 billion), according to the Tianjin Daily.

ICBC Financial Leasing is a subsidiary of the state-owned Industrial and Commercial Bank of China, mainly focusing on the leasing of aircraft and ships.

International observers have forecast that renminbi settlements may account for 20 per cent of the mainland's total foreign trade this year.

There is no question that Beijing is trying to internationalise its currency, albeit through a piecemeal process. When Vice-Premier Li Keqiang visited Hong Kong in August, he offered further support for the internationalisation of the renminbi and its use in offshore settlements.

Some analysts are optimistic about the international prospects for the currency. Li Daokui , a central bank adviser and professor of economics at Tsinghua University, said that making the renminbi fully convertible in the global currency market can be largely achieved in four years.

More conservative economists, such as Yu Yongding, an economist with the Chinese Academy of Social Sciences and a former adviser to the central bank, maintain that, in the short run, there is no need for the mainland to abandon its exchange controls. He said that a more appropriate goal to pursue was to make the renminbi more regionalised rather than seeking its quick internationalisation.

Among international financial institutions, economists' views tend to be more neutral.

Zhang Zhiwei, chief China economist at Nomura International (Hong Kong), expressed guarded optimism. 'The direction of renminbi internationalisation is indisputable. Some progress will come along, but trial and error takes time,' Zhang said.

That may also be why Zhou Xiaochuan, governor of the central bank, has never been willing to give a timetable for the full internationalisation of the currency.

In a joint research paper, Shen Jianguang and Michael Luk of Mizuho Securities Asia said that what can be reasonably expected by 2015 is the renminbi's 'basic convertibility', which is interpreted as capital accounts being largely liberalised, with some restrictions remaining on short-term debt.

By then, there could be a large quantity of renminbi being used and exchanged internationally, the paper said. And the renminbi's exchange rate pegs with other major world currencies would have become basically non-existent.

More countries will be using the renminbi as a reserve currency, while the International Monetary Fund could get serious about including it in its basket of special drawing rights - supplementary foreign exchange reserve assets.

This, however, does not mean the end of the internationalisation effort, according to He Jun, a senior economist with Anbound, a Beijing-based independent consultancy company. To make the renminbi really useful and attractive, the mainland still has to make more internal changes, He said.

It is easy to turn Hong Kong into an exciting marketplace, He said, but if the mainland retains a closed-door financial system dominated by a few state-owned banks, the renminbi's international opportunities will be compromised.

The economist said that right now an invisible great wall, so to speak, exists between China and the rest of the world, with the state-owned banks continuing their old monopolistic game from within and remaining unable to serve the world at large. Meanwhile, international banks remain unable to compete for larger market shares on the mainland that would allow them to bring in money from all over the world.

The domestic bond and stock markets are both performing poorly. But the mainland has to create a much livelier domestic investment market to attract investors from all over the world, He said.

It has been reported that an increasing number of wealthy people are either moving, or are ready to move, to foreign countries. But He said this should not be taken as news with only political implications. The lack of domestic investment opportunities is driving away money to foreign lands, and if the trend continues, he noted, it may hurt the economy as well as the renminbi.

So, the economist said, the would-be role of the renminbi will depend not just on the experimentation in Hong Kong, but perhaps more importantly on the future leadership's strategic plan for the next stage of reform.

6.38 yuan

The renminbi's current exchange rate to the US dollar. The renminbi has appreciated by close to 24 per cent since 1995