“A product of the past” was the headline of the week, and its author Hu Jintao wasn’t referring to the onset of what will be the final months of his term in office.
The changing of the guard that Hu had in mind was something different: an end to the dollar’s domination as reserve currency (“Hu Disses the Dollar” was the more direct take from Fox News).
The news should come as no great surprise. The endgame for Chinese currency policy has been out in the open since widely reported remarks from China’s central bank governor, Zhou Xiaochuan, in March 2009, in which he discussed the creation of a new synthetic reserve currency as an alternative to the dollar. And it is still very much a long term endgame: as others have done before him, Hu acknowledged that turning the renminbi into a fully-fledged international currency “will be a fairly long process”.
His remarks come as the People’s Bank of China have allowed the yuan to strengthen against the dollar in advance of the Washington summit, in a political context in which Tim Geithner, US Treasury Secretary, has reiterated concerns about Beijing’s currency policy.
But there was other news too – most notably that qualified Chinese enterprises will be allowed to use the yuan for investment overseas in activities like establishing new ventures, completing mergers and acquisitions, or equity purchases. Previously, they’ve had to convert into foreign currency to conduct comparable transactions.
To date, Beijing’s policymakers have concentrated mostly on promoting trade-related use of the Chinese currency overseas. Trade settled in renminbi has grown rapidly since restrictions were eased in 2009, to a total of Rmb340 billion ($51 billion) between June and November last year, according to the PBoC. The programme is going global at a “faster than expected pace”, says HSBC, which predicted last year that at least half of China’s cross-border trade will be settled in its own currency within three to five years (a huge $2 trillion call, see WiC88).
But the latest green light goes beyond facilitating trade, opening up a new investment channel too. As such, it looks like more than a bout of last-minute window dressing before Hu’s arrival on the White House steps. It will be emerging markets, which account for nearly 90% of China’s FDI, who see most of the impact, HSBC predicts. Of course, in the shorter term, it might also help in channelling some potential investor cash out of China, no bad thing given the current focus on taking the steam out of domestic inflation (WiC wrote last week about a pilot programme permitting the residents of Wenzhou to invest money offshore too, which may serve a similar purpose).
It also supports the “going out” policy in which Chinese enterprises are being encouraged to invest in overseas assets.
What also matters is whether owners of the assets that the Chinese might target will want to accept payment in renminbi. Much will depend on what they can then do with the cash: currently foreign firms have few options besides buying goods with it from China, or depositing it in low-interest accounts and bonds.
That makes another announcement this month – allowing qualified foreign institutions to make private equity investment in China – a more topical one.
Xinhua says that pension funds, university endowments and long-term institutional investors will qualify for the programme, but they must have three years of experience in investing in Chinese equities. But funds provided by foreign investors to domestic private-equity funds won’t be allowed to exceed 5% of the domestic funds’ total capital. The Chinese authorities may be talking of dollar dominance in the past tense, but they are cautious about advancing too quickly into the forex future.
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