Domestic investors' confidence in redback counts more than foreigners'
The pace of internationalisation of the "redback", as the renminbi is known by some, hasn't just taken off, it has soared.
HSBC Greater China economist
SCMP, March 27
I am one of the people who, in a small way, have helped this soaring take-off. I have personal holdings of yuan denominated investments and I have done reasonably well.
I did not invest in them as any gesture of national loyalty. I did it purely for reasons for greed. I reckoned that Beijing would maintain a policy of strengthening the yuan against the US dollar and so it has proved. The interest rate return is also higher than on the US dollar or Hong Kong dollar.
But I am a fair weather friend of the yuan. Let the indications point to weakness or let there be any hint of exchange restrictions and I am out. I also believe that this pretty much describes the thinking about the yuan among all the investors on whom the recent yuan hoopla has depended.
Exporters to China are happy at present to accept yuan in payment not because they need it to pay for imports or otherwise regard it as a major currency of international trade, but because it offers a good prospect for speculating on a currency gain.
In other words, Beijing has encouraged foreigners to hold yuan by artificially pushing the currency up, which could prove an unsustainable stimulus, rather than by convincing them that the soundness of the central bank's monetary policies will support the yuan.
It is not just a disinterested policy matter. As the chart shows, the mainland's balance of payments position went awry at the end of last year. For all the supposed interest in yuan, a net outflow of money suddenly developed on the capital account, the first in 12 years.
Making up for it at present is a merchandise trade surplus that has once again soared so the overall balance of payments remains in positive territory.
Things were not supposed to go this way. Expectations were that the trade surplus would slowly decline and that stable capital inflows would instead prop up the overall balance. It brings into question the blithe assumption of the redback's imminent threat to the pre-eminence of the greenback.
All the talk at present of a full opening of the mainland's capital account in just a few years, however, ignores one other fundamental difficulty. What counts is not so much whether foreigners can freely hold yuan, but whether Chinese citizens can freely hold greenbacks or any other currency they choose.
Beijing can still easily maintain a close grip on where capital is invested in the mainland if it allows foreigners to hold yuan.
But it cannot hold anywhere near so close a grip if the man in the street in Chengdu can freely exchange his yuan for US dollars, buy shares in an Australian company with the money, lodge the stock with a Swiss custodian and remit the dividends to a London bank account.
When that happens or, rather, if it ever happens, no technocrat in Beijing can decide offhand where any bank will allocate its loans and advances, that is unless he is prepared to underwrite every dollar of deposits in that bank and the depositors believe him.
Otherwise these depositors will just move their money out and take it abroad to homes where they feel it is safe.
Thus it is not the foreigner's confidence in the redback that will allow a smooth opening of the capital account, but the domestic investor's, and the latest balance of payments statistics suggest that his confidence in the redback is not complete just now.