As we enter what seems to be the final act of the euro’s drawn-out Greek tragedy, China’s currency – the renminbi – has been enjoying a few weeks outside the spotlight.
Not that China’s critics are likely to be distracted by the eurozone being centre-stage for long, especially in the US, where rhetoric on the renminbi tends to move in tandem with the electoral cycle.
Eschewing more abstract economic concepts, the currency hawks generally take a more flammable line, including the claim that an undervalued yuan is hitting US jobs.
Hence Fred Bergsten from the Petersen Institute for International Economics told a House of Representatives committee two years ago that “correcting” the renminbi exchange rate would be an excellent way to reduce US unemployment (WiC56).
Every $1 billion in additional US exports would mean 8,000 new jobs, Bergsten suggested, which would mean that well over a million workers would find work if the yuan was to rise by the full 40% against the dollar that hawks were demanding.
By then, some of the members of the Senate Finance Committee were also showing impatience on the issue, telling the Obama administration to “stop slow dancing” with Beijing on currency reform.
Xinhua, a state newspaper, fired back at this “bunch of baby-kissing politicians”, warning that they risked “poisoning the atmosphere” by calling for more action on the yuan (WiC65). This seems to be a view acknowledged in the White House, and Obama’s administration has been reluctant to label Beijing as a currency “manipulator”. His team knows that pressing too hard publicly on the issue could backfire, as the Chinese bristle at what they see as interference in their sovereign affairs.
Of course, there are differing takes on renminbi policy within China too. As we reported in WiC55 officials at the central bank probably see a stronger yuan in a more positive light, especially as a tool in the battle against inflation. But the Ministry of Commerce is less keen on an appreciating currency, particularly if it means tougher times for the country’s exporters.
Nonetheless, the standard Chinese response in the currency debate is to highlight that the renminbi has been steadily appreciating.
It increased in value against a basket of currencies including the dollar by a fifth between mid-2005 and mid-2008 (although Beijing then called a halt as the financial crisis hit home) and then by about another 7% last year.
HSBC analysts even wrote this month that the renminbi story is entering a stage where the market no longer sees the currency as structurally undervalued.
Another common riposte from Chinese commentators is that the Americans are too fixated on the currency issue when they would do better to look closer to home for the reasons for some of their economic problems.
A typical observation: when the yuan rose 21% against the dollar in the three years from mid-2005, the US trade deficit with China jumped with it, from $202 billion to $268 billion.
The US-China Business Council, representing 220 American companies doing business in China, also says that it’s a mistake to believe that Chinese goods currently being bought by Americans would otherwise be made in the US if the renminbi was allowed to reach a fuller value. More likely is that many items would end up being purchased from countries like Mexico, India and Vietnam instead.
The greater irony here is that – away from the rhetoric – the Chinese currency is already going through a hugely significant phase of reform, as we discussed in more detail in our fifth Focus issue, The Rise of the RMB, published in late 2011.
In fact, our first mention of China’s plans to push its currency onto the world stage came earlier, in WiC23. Here we outlined the launch of a new scheme allowing traders in certain Chinese cities to transact directly with counterparts in Hong Kong in renminbi, in what turned out to be the first step in what has become a much wider programme.
It was also the green light for financial commentators to dust off Deng Xiaoping’s “crossing the river by feeling the stones” maxim to explain Beijing’s plan for its currency outside its own borders.
Conceptually, the outline of a few more of those stones is simple enough.
The idea is to get the yuan embedded as a trade currency first, so that businesses outside China grow accustomed to using it as a means of payment for goods and services.
Steps taken in phase one include Beijing’s full roll out of the renminbi trade settlement scheme. Progress has been impressive, says HSBC. Total trade settled in yuan increased four-fold last year to Rmb2.1 trillion ($330 billion), or about 9% ￼of China’s total trade.
To support the programme, China has also signed bilateral currency swaps with 19 countries and regions worth Rmb1.6 trillion.
Next up is to focus on how the yuan can be invested more freely, allowing enterprises and individuals to profit on their renminbi holdings, as well as move them cross-border.
Measures here include the launching of a new breed of renminbi bonds in Hong Kong (WiC88) known colloquially as dim sums. Multinationals including McDonald’s, Unilever and Tesco have joined Chinese firms tapping the dim sum market.
Cautiously, regulators have also been opening up more cross-border channels through which investors can move renminbi in and out of China.
Longer term, the ambition is to challenge the dollar as a global reserve currency, something that Chinese President Hu Jintao pointed to more obliquely last year when he suggested that the prevailing international currency regime was a “product of the past”.
Despite this, an end to the dollar’s dominance still looks some way off.
As we indicated in our Focus issue, 85% of foreign exchange transactions are still classified as trades of other currencies for dollars, and close to half of global debt securities are still dollar-denominated. And if the renminbi is to emerge as a genuine challenger, China will need to develop deep and liquid capital markets, and rethink a series of key policies, including capital controls. Reform here promises to be a complex and potentially risky proposition.
But back to the present day, and the flurry of renminbi announcements at least allows for a different slant to the currency debate – a little less dispute about how the renminbi should be valued, and a bit more discussion about how best to cash in on its cross-border spread.
Hong Kong has been the big winner here in cementing its status as the dominant offshore hub for the Chinese currency (see WiC119), although other cities, including London, are hopeful of securing a share of the spoils (WiC136).
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