March of the yuan as global currency has passed the point of no return
Insight page, May 7
Two days earlier it was the same message with the same placement on the Insight page but under the heading "Price volatility signals the yuan is close to becoming a global currency". One was written by a functionary from HSBC, the other by a Standard Chartered counterpart.
I assume the purpose was the same. In order to lead a trouble-free corporate life across the border, a bank must periodically demonstrate that it has joined the choir singing the praises of Beijing's "unwavering and resolute political will" (yesterday's offering).
Just what is a global currency? On one level the term implies that its coin comes in the form of an orb rather than a disc but, no, I have an even more pointless definition.
A global currency is one that makes people around the world sit up and say: "Wow, look at that currency go. Ain't that some currency? I wish I had a currency like that. Gee whiz, them people in China sure are lucky. They must be No1 country in the world with that currency."
And, strange to say, I suspect that if people around the world did sit up and say all this, we would soon have a good deal less yuan hoopla inflicted on us. Beijing's object would have been achieved.
In order to get there, the game plan calls for little tweaks to be made in rules for how people can convert yuan to other currencies and then to hail each in turn as a groundbreaking, fundamental reform. I offer a few examples:
The yuan is on its way to its undeniable destiny because some trade settlements are now made in yuan.
What has actually happened here is that some exporters to China have been happy, until recently anyway, to accept yuan in payment as this has allowed them make speculative profits off a rising yuan.
The yuan's recent weakness proves it can go up or down just like any market-driven currency.
It actually proves that Beijing is rattling the cage bars of a balance of payments trap from which it can see no escape. A strong yuan has exporters screaming of loss of export competitiveness. A weak yuan induces a balance of payment deficit as capital flows out. The mandarins don't really know what to do.
China has by far the world's biggest international reserves (US$3,948 billion). This makes the yuan a global currency.
No, it does not. It makes the US dollar a global currency because that is how most of these reserves are held. Giant reserves, however, are invariably evidence of a manipulated currency and, in China's case, of financial sector weakness as it is commercial banks that really carry this load. They incur considerable losses in doing so.
Some foreign central banks now hold yuan as part of their international reserves. This makes it a global currency.
When you hold 27 times as much money in foreign reserves as the United States feels it necessary to hold (US$144 billion), you can ask for a few favours to keep up appearances.
Shanghai is to be a pilot free-trade zone and Beijing has approved cross-trading between the Shanghai and Hong Kong stock exchanges, all evidence of an unwavering and resolute will.
This pilot flies a toy aeroplane and does not even know yet how he will get it off the ground. The cross-trading will see little Hong Kong money going to Shanghai. Who wants that dysfunctional market? The flow will go the other way. The Shanghai grab is for US dollars, not funny money.
The yuan is the ninth most actively traded currency globally.
Yes, smack between the Mexican peso and the New Zealand dollar, says the Bank for International Settlements. Big stuff. Even this rating is achieved only by including trade receipts settled with letters of credit alone. China trade is almost all settled in LC. Elsewhere between major trade partners, the figure is an estimated 20 per cent.