Chinese renminbi 中国人民币 – the new currency of the 21st Century

Chinese renminbi 中国人民币

The Internationalisaltion of the 中国人民币

Before the 2013 Spring Festival 春节, the People's Bank of China named the Singapore branch of the Industrial and Commercial Bank of China the clearing bank for yuan in Singapore. China sees Singapore as its regional partner for the extension of yuan internationalisation. The aim is that the emergence of new offshore centers will expand the existing regime instead of creating competing systems.

So far, Hong Kong has had a good eight-year head start and remains the dominant offshore center of the Chinese currency, handling around 80pc of offshore trading.

Once the clearing mechanism is set up in Singapore, there will be greater transparency in the movement of yuan funds. Singapore will be the gateway for China in the Southeast Asia, which provides a platform for Beijing to facilitate wider use of yuan in trading with Southeast Asian nations.

London and the Chinese renminbi 中国人民币

At present, a cross-border trade settlement scheme is driving liquidity into 人民币 offshore markets. The size of the offshore 人民币 liquidity pool a financial centre can generate, therefore, largely rests on bilateral trading volume. Compared with Hong Kong, which had $283.5bn of bilateral trade with mainland China in 2011, the UK’s trade with China was only worth $58.7bn. Further, the 人民币 is barely used as a trade settlement currency in UK-China trade. 

London is therefore limited by liquidity concerns, even though it hosts deposits of 人民币109bn. This issue will remain a challenge until the 人民币 becomes fully convertible as an international currency. The City could perhaps attract a significant volume of 人民币 resources through its advantage in global foreign exchange trading. But, for as long as the cross-border trade settlement scheme remains the major pillar in China’s 人民币 strategy, the City will not be a become a big player. 

A second stumbling block is the technical difficulty caused by the 人民币 clearing system. In the offshore 人民币 market, up until now only Hong Kong has been thoroughly equipped with both the 人民币 real-time gross settlement system, which allows swift, large fund transactions, and with a人民币 clearing bank, Bank of China (Hong Kong). 

London is lacking this critical 人民币 settlement system. It also doesn’t have a local人民币 clearing bank. Even if the City is in a good position to gear up global demand, the majority of those offshore 人民币 transactions still have to be conducted via Hong Kong. As a result, market practitioners see less benefit in concentrating their 人民币 businesses in London. Multinational corporations can simply shift 人民币 deals to Hong Kong branches (or perhaps to Singapore). In other words, until London has the requisite financial infrastructure, it will struggle to be more competitive. 

Thirdly, and perhaps of most concern, is the differing understanding of Beijing’s 人民币 internationalisation strategy in the Bank of England and the UK Treasury. China’s 人民币 strategy is a policy-driven process, with deep public sector involvement. The most evident example is the role of bilateral currency swap agreements. In Beijing’s view, a bilateral agreement between central banks has profound implications beyond the intrinsic value of the swap itself. It represents a will to jointly develop 人民币 offshore business at the level of officialdom.

However, the Bank of England sees limited value in establishing a line in currency swaps. The 人民币 is not yet fully convertible, and the size of its global offshore market is neither large or liquid. The Bank insists that the private sector should take the initiative. It therefore remains reluctant to get involved in the swap issue. The UK Treasury, on the other hand, is making great efforts to initiate policy dialogue with Beijing and Hong Kong. It wants to push the City towards the front tier of the 人民币 offshore business, and thereby boost the economy through a closer relationship between China and the UK.

While the development of the offshore 人民币 market remains contingent upon China’s financial reform process, whether the Bank of England and the UK Treasury can take collective action will ultimately determine the City’s future in the 人民币 internationalisation game. The Geo-Trade Blog will continue to follow closely new developments on the internationalisaltion of the Chinese renminbi  中国人民币.

From the Spanish dollar to the US dollar – a new international world currency for the 21st Century?

 

Printing press making US dollars, the world's currency reserve at present

In the 18^th century, the Spanish dollar (real de a ocho or the piece of eight in English) became the first ever, truly, world currency. It was used in Europe, the Americas, the Middle East and throughout Asia. It was minted in the Spanish Empire in the Americas from 1497.

Spanish-American silver was used for the world currency. Mints set up in the new world produced silver coins, mostly for export to Spain. Trade and Spanish Government spending spread the Spanish dollar coins into the rest of Europe. They were carried by merchants into the Middle East and beyond by the new sea routes to India and China. Spanish-American silver dollar coins crossed the Pacific to the Philippines and on into China and Greater Asia. Hence it was that the Spanish dollar was the first world currency and the real de a ocho coin became the coin upon which the US dollar was later based.

US dollar's reserve currency status

In the 21^st Century, the US dollar has the all important world reserve currency status. The bedrock of the dollar's reserve status is its role as the global petro-currency. This status often allows the dollar to defy gravity even though the US keeps borrowing and expanding its money supply.

At a Summit in April 2011 attended by the BRIC countries (Brazil, Russia, India and China) in China, a key topic on the agenda was the US dollar's reserve currency status. There have been rumblings for a while that the BRIC countries would like to see their economic power mirrored in the reserve currency. They view the advantages that the US gains from the dollar holding the reserve currency status to be unfair. As a result the BRIC countries have recently begun to offer each other loans in their own national currencies, not in US dollars. And the Chinese Development Bank has now formally offered 10bn yuan loans to other BRIC members for large oil and gas projects. Russia and China are now too trading oil in rubles, rather than dollars. This is of enormous Geo-Trade strategic importance as it could begin to weaken the dollar's role as the global reserve currency especially since a new Sino-Russian oil pipeline has recently opened that will pump 1bn barrels of oil a year from Russia to China.

Furthermore the BRICs are all creditors to the US – with the Chinese in particular holding vast amounts of US Treasury bonds. Due to this, it is unlikely that they will make moves to dislodge the dollar as this would harm the value of their own Treasury bond holdings. Instead, the BRIC countries are pushing for the IMF to overhaul the role of Special Drawing Rights (SDR), the international unit of account comprising the US dollar, euro, yen and sterling.

The BRICs would like the IMF to include the yuan and the ruble in the Special Drawing Rights (SDR), if that were to happen, then the SDR would be able to ultimately replace the US dollar as the global reserve currency. That would mean the end of US global hegemony and it would force the US to address its massive overseas debts.

The US dollar keeps on falling

The US dollar has been on the decline for some time but recently decline has taken it to new lows. The chart below sourced from The Economist shows the nominal exchange rate, in trade-weighted terms (ie, against the country’s trading partners). The index is now 30% below its level when the Bretton Woods System was abandoned in the early 1970s.



Chart of US Dollar Exchange Rates for the last 40 years

What does this all add up to?

At present the US' creditors (many of them BRIC countries) are having to cope with the unappealing combination of holding low-yielding Treasury bonds in a depreciating currency combined with their desire to begin to exert influence on the global economy in line with their economic weight. The 21^st century looks certain to see in a new era and a potential new international world currency emerging. It is wholly possible that a revised basket of currencies making up the Special Drawing Rights Reserve could take on this role.