Jake's View

HKMA's push for yuan as an economic pillar is puzzling

PUBLISHED : Sunday, 28 April, 2013, 12:00am
UPDATED : Sunday, 28 April, 2013, 5:02am

The Hong Kong Monetary Authority's measures came as the [yuan] climbed to a 19-year high against the US dollar amid strong growth in the use of yuan for worldwide trade and investment. It is now the 13th-most used currency for international payments.

SCMP, April 26

Why should a company outside of China want to accept payment in yuan for goods exported to China? Where can it find yuan to pay for imports from China?

Things are different for the US dollar. It is used everywhere to settle trade accounts. If you accept payment in US dollars you can immediately put that money to work without having to convert it into your domestic currency, and if you want to pay in US dollars you can easily raise the money anywhere.

The US dollar is so prevalent in trade that China itself reports its trade figures in US dollars and only publishes their yuan equivalents as an afterthought. This is entirely appropriate. Ask a mainland exporter to quote you a price and he will do so in US dollars. He thinks in dollars, he breathes in dollars. Why turn to yuan for something that the dollar already does superbly?

Short answer: Because Beijing envies Washington's ability to ignore balance-of-payments worries. At US$3.4 trillion, China holds 22 times as much in foreign reserves as the United States and it bothers the mandarins in Beijing that it is nonetheless they who are beset with constant headaches about capital flows and exchange rates. If the yuan was king it wouldn't happen (or so they think).

Shorter answer: Because in Beijing this is taken as a point of national pride. China will soon be the biggest, richest country. Everyone says so and how can you be No 1 if the flag you wave abroad, that red banknote with Mao Zedong's picture on it, is still only No13? When Britain was tops, the pound wasn't No13. It's just not fitting.

Leave Beijing thought aside, however. We want to explore the mindset of the foreigner on whom "the strong growth in the use of yuan for worldwide trade" is based. It's simple. He doesn't use the yuan for trade. He uses it for speculation. When he accepts payment in yuan for goods exported to China he holds on to it or puts in one of those dim sum bonds. It's delicious stuff that way because he makes a profit on the exchange rate.

Meanwhile, that other kind of foreigner who buys rather than sells things to China uses the yuan no more than he ever did to pay for his imports. He doesn't have any yuan. The receipts of US consumer goods retailers are all in US dollars. Try to pay for plastic rubbish with redbacks in a big box store in Texas if you don't believe me - ("What are dem things? You figger we're playing Monopoly or somethin'?").

Thus the upwards push on the yuan right now is a very one-sided push and it all comes from people who are being paid to push and who will let the yuan drop with a crash the moment they think that their pay may stop coming.

I can see why Beijing is happy to play along with them at the moment. It needs their money. Last year saw a US$96 billion net capital outflow, the biggest such amount in history. But what I cannot fathom is why anyone at the Hong Kong Monetary Authority should think this fleeting game is something on which to build the longer-term strength of our own economy. That's a puzzle indeed.