Shocking news for believers in yuan as new world currency

A desire for an internationalised yuan is misplaced – as was made clear last week, ending capital controls too soon could have devastating effects

PUBLISHED : Tuesday, 09 April, 2013, 12:00am
UPDATED : Tuesday, 09 April, 2013, 4:24am

Last week an outfit called the Institute for New Economic Thinking held its annual conference in Hong Kong.

There may have been some new economic thinking going on, but with conference sessions with titles like "Intersubjectivity: René Girard's vision of mimetic desire and economic dynamics", it was hard to tell.

From the floor, it looked like the same old academics, bankers, business executives and policymakers, all spouting the same old clichés, jargon and waffle.

Most of the assembled worthies had utterly failed to understand that to be useful, economic thinking - new or otherwise - must be intelligible to ordinary people.

So here's a suggestion for future conferences: give each audience member a remote control unit with a big red button to press whenever one of the speakers comes out with a tired old platitude or a piece of meaningless blather.

If the number of listeners pressing their buttons at any one time passes a preset threshold - say 50 per cent - then electrodes implanted in the speaker's chair will immediately jolt him or her with a short, sharp electric shock.

Consider it a form of aversion therapy. The chances are it would only need the delivery of a few painful jolts for some genuinely new - and actually intelligible - economic thinking to start to emerge.

Among the few plain speakers who would have escaped unshocked last week was National Development and Reform Committee adviser Yu Yongding, who poured a well-deserved bucket of cold water over those panellists who argued that China's yuan is on a fast track to full convertibility and international reserve currency status.

"I'm sceptical," he declared bluntly, saying that Beijing should perform a careful cost-benefit analysis before widening the yuan's international use.

Yuan internationalisation, he said, might be useful for reducing exchange rate risk for China's importers and exporters, and for reducing Beijing's exposure to the US Treasury bond market by slowing its accumulation of foreign reserves.

But for a currency to be widely accepted internationally, it must be fully convertible, which would mean allowing capital to flow freely across China's borders.

That, Yu explained, would be risky. If China's capital account was liberalised tomorrow, the chances are there would be enormous capital outflows.

At the end of February, China's banks were sitting on local currency deposits worth 94 trillion yuan (HK$116.36 trillion), or 180 per cent of the country's gross domestic product.

With depositors worried about China's ballooning shadow banking system and its fast-rising levels of corporate and local government debt (see the chart), it is likely that they would take advantage of any capital account liberalisation by shifting some of their assets abroad.

But if they diversified just 10 per cent of their deposits into foreign currency assets, the outflows would amount to 9.4 trillion yuan, or 18 per cent of China's GDP.

Outflows so big would wreak havoc on China's fragile financial system, Yu warned.

The opposite problem could be equally damaging, with big inflows likely to stoke domestic inflation, whether in consumer or asset prices.

As result, Yu warned that Beijing should tread carefully, first reforming China's domestic financial system and only then moving in a gradual step-by-step process towards opening its capital account and internationalising the yuan.

That's not what most of the self-declared proponents of new economic thinking assembled in Hong Kong last week wanted to hear. Many of them were arguing that the yuan will be widely accepted as an international currency within the next two to five years.

They deserved the shock.