Jake's View

Yuan's globalisation will take a while

PUBLISHED : Tuesday, 21 August, 2012, 12:00am
UPDATED : Monday, 27 June, 2016, 11:50am

The internationalisation of the renminbi is expected to continue to pick up pace, alongside the ongoing liberalisation of China's exchange rate, capital account and domestic financial market.

Donna Kwok, HSBC Greater China economist,
Insight page, August 20

You hear a lot of that line these days. Who says the yuan is funny money? There are almost as many fancy ways of losing money in it as there are in US dollars now.

Just you wait. The day will come when you will ask for a burger in a McDonald's outlet in New York and the slinger will say: "Yes, sir, 15 yuan please." It's the coming thing.

Unfortunately, it's been coming a bit more slowly recently, and in some ways it has never come at all. The gateway to yuan internationalisation has been that strange thing, a door that lets outsiders in but does not let insiders out.

Take, for instance, all the hoopla about yuan deposits in Hong Kong, a virtually non-existent business a few years ago but one that topped out at 637 billion yuan (HK$778.3 billion) late last year.

What happened was that importers in China had long sought to pay their bills with yuan, but the idea found few takers until outsiders were allowed yuan convertibility and saw a money-making bet in a currency that was appreciating by 5 per cent a year against the US dollar and offering higher bond yields, too.

The idea had been that all this yuan would be used in two-way trade. Foreign exporters to China would accept it in payment and then use it to pay for imports from China. The second half of that equation never worked. The yuan was used only to speculate against Beijing's currency manipulation.

And now the whole business has slowed down, anyway. The yuan has weakened against the US dollar for the past four months, and no one really wants it any longer. Those Hong Kong yuan deposits are now 70 billion yuan down from their November peak.

In fact, the entire trend of investment inflow into the mainland has changed. The mid-year balance of payments figures are in, and they indicate that there was actually a net investment outflow in the 12 months to June.

The underlying difficulty is that internationalisation of the yuan, better defined as opening the capital account, is like an on-off switch. You either have it or you don't. Anything halfway between is unstable and just gives you trouble.

"On" for internationalisation means that the lowliest worker in Liaoning province can tell his bank to convert his yuan deposits to US dollars and then invest them in Facebook shares if he wants (to lose money), arranging at the same time for custody of those shares in New York and payment of dividends (if any from this dud) to an account in the Channel Islands.

Very few workers in Liaoning would do it, of course, but it would still fundamentally undermine Beijing's authority over their personal assets. If they don't like the returns and risks on their money at home, they would be able to take it away from their banks, which means, in turn, that Beijing would no longer be able to tell those banks where to advance the money.

It is the key reform in internationalisation of a currency, and Beijing is nowhere near making that reform.

All that the authorities have done is made a few cosmetic changes around the edges of the capital account to allow foreign money to play with the yuan. They have then congratulated themselves on making big advances. It is a public relations triumph alone.

It doesn't surprise me that pundits hired by banks feel themselves obligated to provide a chorus to this song of self-praise, but not to worry. It will be many a year yet before you need yuan to pay for a burger in New York.