Year of the Yuan - China's Explosive Currency Goes Global

7/30/2019 Year of the Yuan - China's Explosive Currency Goes Global

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Year of the yuan:China's explosive

currency goesglobal

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Article Code 85258080768 CH


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http://rt.com/business/yuan-china-currency-global-561/

The peoples currency of China is redefining the global economic monetary

system. The closed-capital pariah is blossoming into a reserve standard and ishedging appeal against the indebted dollar and the untested euro, piquing

foreign interest.

Degenerating credit quality across the board has prompted asset managers toshy away from the dollar, euro, Japanese yen, British pound, and Swiss franc.And some are turning to the yuan, a currency that 10 years ago wascompletely off limits to foreign investors.
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An HSBC forecast projected that by 2015, the yuan will become one of thethree most used currencies in global trade, in league with the dollar and euro.

The report, issued in April, also foresees a third of Chinas cross-bordertransactions being carried out in yuan.

China has been making a concerted effort to establish itself as an internationalcurrency reserve. China already has agreements with Russia, Vietnam,Thailand, and Japan allowing trade to be settled in yuan instead of dollars


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As China launches its global currency, European financial centers are hopingto become Europes yuan hub. London, Paris, and Zurich have all made very

vocal bids for this title. According to Bloomberg, the Bank of England has aninside track to be the first Group of Seven nation to sign a currency-swap with

the People's Bank of China. The deal may grant the UK central bank as muchas 400 billion yuan ($64 billion) in reserves.

Many national banks are switching over to the yuan to diversify their reservecurrencies, Australia the most recent to join ranks with the worlds second

largest economy.


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The Reserve Bank of Australia announced in April it will transfer 5 percent ofits foreign currency reserves ($2.1 billion) into Chinese bonds, deepening tieswith its Pacific neighbor and biggest trade partner, and reflecting a global shiftto the yuan.

The move is an important milestone in deepening our financial and economiclinkages with China,Australias Treasurer Wayne Swan said in an emailed

statement to Bloomberg.

China and Australia are major trading partners, so an investment in Chinesecurrency reserves will benefit transactions between the two countries. Now,

they can conduct business transactions directly from yuan to Australian dollar,cutting out the middle man, the US dollar or euro.


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The Chinese yuan is the 13th most-used currency in the world for internationalpayments, according to a February 2013 report by the Society for WorldwideInterbank Financial Telecommunication (SWIFT). It jumped 6 places from theprevious year.

SWIFT reported that the value of payments in yuan soared $171 year-on-yearin January, or 24 percent. The yuan has surpassed the Russian rouble and theDanish krona in international transactions. Close behind are the South Africanrand and the New Zealand dollar. The euro is the most used currency,followed by the US dollar, and then the British pound.
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The debutThe yuan has been dubbed a hermit currency, isolating itself from foreign

investment and setting its own rules, but is now slowly entering worldcurrency markets.

The hermit is ready to come out of its shell and the sooner the better forChina to play a major role in the global economy,said Patrick Young of DVAdvisors.

Cross-border yuan payments through Singapore rose 30 percent month-on-month in January 2013. Payments through London grew at an even faster

pace, at 40 percent, according to the HSBC report.


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The top-five currencies for international payments in January 2013 were theeuro (40.17 percent), the US dollar (33.48 percent), the British pound (8.55percent), the Japanese yen (2.56 percent), and the Australian dollar(1.85 percent).

The Yuan will take its place as a leading global currency, it is not likely tochallenge the dollar's hegemony for some time, Patrick Young said.

In 2012 there was a 900 billion yuan ($145 billion) increase in tradepayments, according to The Economist. Only three years ago there werealmost zero transaction payments settled in yuan.


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The world's reserve currencies are distributing away from dollar centrality

to a broader spread of currencies. To that end the Yuan and indeed the

rouble are all likely to take a greater share of global reserves as indeed the

economic power of the east expands,Young added.

Recent economic problems linked to the euro and the dollar have set atrend for currency reserve diversification as an alternative, YaroslavLissovolik, chief economist at Deutsche Bank in Moscow toldRT.


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It is definitely a trend and this trend will continue. There is a globaldemand for more reserve currencies. The world economy wants todiversify the set of reserve currencies as a way from the volatility and the

problems associated with the current reserve currencies, because both theUS and Europe are plagued by economic problems. This is natural andclear that the global economy should use more foundations, more columnson which to stand and build a stronger foundation of a more complexglobal economy, said Lissovolik.

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The numbers are on the rise, but they still pale in comparison to the dollar. Theyuan only comprised a 0.63 percent market share of the global currencymarket as of January 2013. Its ranking is still a minute fraction of Chinas

export market, the worlds second-largest, after the EU.

The dollar, the current market and commodity standard, totals $11 million incurrency reserves


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Dim sum bondsAnother pin in the narrative of the yuan is Hong Kong and dim sum bonds.The yuan hasnt been officially available for foreign trade, but dim sum

bonds, a bond dominated in Chinese yuan assets and issued in Hong Kong,has allowed foreigners a loophole to invest in domestic Chinese debt.

China has set up special administrative regions in Guandong province, HongKong and Macau, which operate with their own currencies, but are still closelylinked to the Chinese economy.


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Hong Kong has long served as a roundabout way to get exposure to Chinas

closed capital market, but still only equal about 1% of those in mainlandChina. The offshore status allows foreigners to circumvent the tight currencycontrols through the financial hub.

The more offshore (or onshore, in the case of Hong Kong) deposits that are

out of the control of the PBoC, the less effective the capital controls are.


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History of currency manipulationThe yuan hit a 19 year high on April 26 at 6.1616 against the dollar after thePBoC loosened controls on the reference rate to increase investment, as

well as an effort towards making the yuan a floating currency by 2015.

In 2012, the yuan advanced 1 percent against the dollar, but in 2013, it couldappreciate between 2.1 percent to 6.1 percent, according toa Bloombergsurvey.


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China insulates the yuan under strict government controls but has recently takensteps to trim the nations reliance on the dollar by establishing demand for their owncurrency.

China severed its currency peg to the dollar in July 2005 after 10 years of a stable,almost unchanging exchange rate.

Before 2009, the central government had prohibited export of the currency and itsuse as tender in international transactions.By keeping the floodgates of market volatility closed for more than a decade, thevalue of the yuan has been set at an artificially low level, which in part facilitatedChinas 30 year export boom. China enabled its currency to strengthen 21 percentbetween July 2005 and July 2008, including an inaugural single-day gain of 2percent.

With almost no international capital flow, the fixed currency safeguarded China fromthe Asian financial crisis of 1997 and the US banking crisis of 2008 and subsequentworld recession.


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Appreciation efforts were cut off to brave the global recession and climbed 10percent against the dollar since the state deregulated controls on June 19,2010.

The consensus among politicians and economists alike is that the yuan isexpected to float in 5 years.

Before the yuan can float, be dictated by markets and not government

manipulation, China will have to restructure its interest rate system, which,

currently set by the state, has little maneuverability and range.


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If China accelerates the process, implications are bullish. A higher interest ratewill slow investment expansion and growth, which will kick back GDP. If theyuan becomes too expensive too quickly, it will hinder export demand, alifeline to Chinas economy which has kept it relatively unscathed from the

worldwide recession.

If the yuan rises too quickly, it will also inflate prices, which could force toy,textile, and electronic factories to move inland in search of cheaper labor.

Chinas growth has slowed to 7.7 percent in the first quarter, missing the 7.9

percent benchmark of the previous quarter. China must find closely monitor its

growth slump in tandem with currency valuation. Because of its export-driveneconomy, relinquishing full control of the currency in the short-term is highlyunlikely.

Year of the Yuan - China's Explosive Currency Goes Global

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