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China's currency arrives on the world stage

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China's currency arrives on the world stage

Unread postby vox_mundi » Sun 17 Jan 2016, 13:56:26

China's currency has arrived on the world stage

China's currency on a path to becoming a global reserve currency

On the last day of November 2015, at the conclusion of its five-yearly review of the composition of the Special Drawing Rights (SDR), the IMF elevated the renminbi to its SDR basket. The RMB is now one of five major "freely usable" reserve currencies in the international monetary system.

The elevation is recognition of the progress made by Beijing over the past half decade in liberalising and deepening its monetary and financial systems. It is also a vindication of the RMB internationalisation strategy championed by the People's Bank of China under Governor Zhou Xiaochuan. The strategy was initiated in response to the global financial community's quiet rejection of an earlier Chinese proposal for a new international reserve currency, with an enhanced role for the SDR.

In early 2009, deep in the trough of the global financial crisis, Governor Zhou had proposed the creation of a super-sovereign reserve currency that was to be disconnected from individual nations – and thus from their credit-based national currencies. It would be issued in accordance with predictable rules and would remain stable in value. As a first step, he suggested the SDR be enhanced as a reserve asset and that it be made usable as an invoicing and settlement currency for international trade and financial transactions. In time, it could be backed by real assets such as a reserve pool.

The proposal was greeted politely, but it was left to wither on the vine.

The proposal was partly motivated by the People's Bank's apprehension of large capital losses on – and lack of alternatives to – its towering dollar-denominated reserve holdings. This apprehension stemmed from potential macroeconomic and exchange rate instability engendered by the US government's crisis-driven fiscal stimulus and quantitative easing policies. Determined to transcend this dilemma, Governor Zhou chose his next best option: to internationalise the renminbi by making it usable as an international invoicing and settlement currency.

THREE-STAGE JOURNEY

Starting with a pilot scheme four months later to settle cross-border trade between the mainland and Hong Kong in RMB, China embarked on a three-stage march to currency internationalisation. In the first stage, the renminbi was to be tested as a unit of account for international transactions by allowing it to circulate outside the mainland. Deepening and widening this pool of currency overseas, including via the development of offshore RMB-denominated asset markets, was to be the second step. Foreign entities were permitted in 2010 to tap into these accumulated overseas balances and issue RMB-denominated bonds, dubbed "dim sum bonds".

In late 2011, the third stage was inaugurated, with enterprises in Hong Kong and qualified investors permitted to use offshore renminbi proceeds for onshore investments. These reverse flow measures, aimed at internationalising RMB bond markets inside China, were progressively broadened and accelerated during the past year.


In November 2014, international investors were granted direct access to mainland equity markets via the Shanghai–Hong Kong Stock Connect scheme. In July 2015, prior approval to invest in onshore bond markets was scrapped for foreign central banks and other sovereign-linked investors. In October, China launched a Cross-border Inter-bank Payments System that connects global RMB users and provides a streamlined platform for payments clearance and settlement. And earlier this December, South Korea became the first sovereign to issue RMB-denominated bonds, dubbed "panda bonds", onshore.

As this process of internationalisation has proceeded, a complementary set of far-reaching financial deepening initiatives related to interest rate deregulation and exchange rate reform were undertaken.

So where to from here for the renminbi?

LESSONS FROM THE GREENBACK

Economic history provides a useful guide. In the early 1910s, despite the US being the world's largest exporting nation, virtually no trade credit was provided by US banks or denominated in dollars. Such credits originated in London, were denominated in sterling, linked to Great Britain's global trading network, traded on active secondary markets back in London, and backed by the Bank of England during bouts of market illiquidity. With the creation of the Federal Reserve and the removal of overseas branching prohibitions, the greenback rivalled sterling as a leading international currency by the end of the decade.

Likewise, the redback will assume its position, albeit more gradually, alongside the dollar as a premier reserve currency in the international system. This will unfold as renminbi-based claims increasingly circulate overseas, as an active secondary market for RMB-denominated securities – open to residents and non-residents alike – acquires qualitatively greater depth, and as the People's Bank establishes its credentials as a market-maker of last resort for such securities.

During this transition phase, Beijing must vigilantly guard against exchange rate overvaluation and the excesses that typically accompany financial deregulation. It also needs to whittle down the sheer scale of bank liabilities as it liberalises the capital account. To play banker to the world, China must ultimately be prepared to borrow short, lend long and bolster its "lender of last resort" function with a fiscal backstop that is globally credible.

A super-sovereign reserve currency, managed by a global institution and used to control global liquidity, is a worthy aspiration but a distant one. As G20 president, China might instead imaginatively lay the groundwork for a set of more attainable SDR-linked arrangements that will reinforce the fraying global financial safety net.

This could include the provision of all financing during crises with SDR loans. It could also involve the release of SDRs during crises to fund the IMF's operations as it intermediates the provision of liquidity between reserve currency central banks and recipient central banks in crisis-stricken countries. This would be a worthy contribution to the debate by the SDR club's most recent entrant.
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As Petro-Yuan Looms, Bundesbank Adds Renminbi To Currency Re

Unread postby AdamB » Thu 18 Jan 2018, 12:05:32


Just days after China's (denied) threat to slow/stop buying US Treasuries, and just days before the launch of China's petro-yuan futures contract, Germany's central bank confirmed it would include China's Renminbi in its reserves. The FT reports that Andreas Dombret, a member of Deutsche Bundesbank’s executive board, said at the Asian Financial Forum in Hong Kong on Monday that the central bank had “decided to include the RMB in our currency reserves”. He said: “The RMB is used increasingly as part of central banks’ foreign exchange reserves; for example, the European Central Bank included the RMB [as a reserve currency].” The Bundesbank’s six-member board took the decision to invest in renminbi assets in mid-2017, but it was not publicly announced at the time. No investments have been made yet; preparations for purchases are still ongoing. The inclusion in the German central bank’s reserves basket


As Petro-Yuan Looms, Bundesbank Adds Renminbi To Currency Reserves
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Re: China's currency arrives on the world stage

Unread postby Outcast_Searcher » Thu 18 Jan 2018, 15:02:38

All well and good. Over time, some sort of an economic clout based blend of currencies as the world's foreign exchange base makes far more sense than using the recent economic leader only.

In a world with a huge, liquid, FX market which trades roughly $5 trillion of currencies DAILY, and surpanational currencies that have been traded for years, I still don't see this as a big deal. (ANY entity with means can own whatever combination (long and short included) of currencies they want to at any moment the FX markets trade).

For example, I've never seen a reasonable case made for why this implies economic "doom" for the US (as so many permadoomers love to assert on blogs, etc) in the face of the reality of, for example, the modern FX markets.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: China's currency arrives on the world stage

Unread postby KaiserJeep » Thu 18 Jan 2018, 15:27:24

I see this as another form of diversity that increases resilience for the global economy. It's not completely so, because the US and China have a huge trade that is entirely dependant upon petroleum bunker fuel for frieghter ships. As such fuel becomes unaffordable, China will see an increased cost for the food we ship to them (mostly grains and meats) and we will see more expensive manufactured goods. Eventually the fuel costs will make US manufacturing and Chinese Agriculture more viable than the imported alternatives.

The currencies, after all, are mostly virtual ones that exist only in a digital reality. Merely a way to keep score.
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