Thursday, November 24, 2016
China working to make yuan key currency
Yasushi Kouchi, (c) 2016, The Japan News/Yomiuri(c) 2016, The Japan News/Yomiuri
The Chinese government is making strategic moves to construct an Asia-based economic bloc based on the Chinese yuan, also known as the renminbi, with the ambition of turning it into a currency capable of replacing the U.S. dollar in the world economy. But China's currency strategy under the one-party rule of the Communist Party may have a negative impact on the global community.
The Chinese yuan was added to currencies that constitute the special drawing rights of the International Monetary Fund on Oct. 1. Consequently, the yuan has attained the highest level of trust accorded to an international currency, ranking alongside the U.S. dollar, the euro, the Japanese yen and the British pound.
Currently, U.S. dollars are overwhelmingly used for settlement in trade and cross-border investment, accounting for 42.5 percent of settlements as of August this year.
The yuan ranks fifth, accounting for 1.86 percent of payment volume, immediately behind the Japanese yen, which accounts for 3.37 percent. With the yuan now included in the basket of currencies making up the SDR, the currency's payment volume share will likely increase. Major powers will build up foreign-currency reserves in yuan, and yuan-denominated financial instruments will begin to appear on world markets.
In short, it is expected that the yuan will eventually be widely used around the world.
The yuan's inclusion in the SDR basket is simply one step in China's aim for economic supremacy. The final "dream" China has its sights set on is for the currency to replace the U.S. dollar as the world's key currency.
This dream started with the Lehman shock back in 2008, when the financial panic that began in the United States raced around the world in the blink of an eye. Industries worldwide suffered hellish difficulties amid an economic slowdown so terrible it was described as an "evaporation of demand."
It was China, at that juncture, that propped up the world economy through government expenditures amounting to 4 trillion yuan (about 60 trillion yen at the exchange rate at that time). In April 2009, then President Hu Jintao - ebullient amid worldwide accolade - pretentiously called at the Group of 20 summit meeting for the assembled leaders to promote a multipolarization and rationalization of the international monetary system.
That powerful punch to the U.S. dollar system served as the starting gun for China to begin fulfilling its currency ambitions.
Under President Xi Jinping, China's move toward currency supremacy has picked up speed. Using the "Chinese Dream" slogan for "the great rejuvenation of the Chinese people," Xi has committed to reviving the great nation under "socialist modernization" by 2049, the 100th anniversary of the founding of the People's Republic of China.
To probe the Xi administration's currency strategy, people involved in finance in various countries refer to "Chinese Currency and the World," a book by Chen Yulu.
Yulu, a former president of the Renmin University of China, currently serves as deputy governor of the People's Bank of China, the country's central bank. The book, published in 2010, has been published in languages including English, Korean, Russian and Japanese.
The book lays out a plan for internationalizing the yuan, a project to be carried out in three 10-year stages.
The first is to have the yuan - by about 2020 - used in China's trade with neighboring countries. By about 2030, the range of the currency's use should be expanded to Asia. Finally, by about 2040, the yuan should be the most important currency worldwide.
Two concrete policies aimed at bringing this about are the "One Belt, One Road" initiative to create a land and maritime Silk Road, and China's advance into the global financial arena. This advance into the global financial arena is symbolized by the Asian Infrastructure Investment Bank (AIIB) that opened in January this year under China's leadership. Infrastructure such as roads, railways and energy facilities will be built across a broad stretch of territory, from China all the way to Europe.
Funding will come from the AIIB and China's own Silk Road Fund. It is also anticipated that the New Development Bank, established in Shanghai by China along with Brazil and other BRICS nations, will become increasingly involved in the Silk Road initiative.
China aims to encourage the circulation of the yuan through building up infrastructure and the traffic of people and goods through it.
However, there are some possibly serious consequences.
In September, the U.S. Treasury Department subjected a trading company headquartered in Dandong, China, along with four of its key officers, to sanctions that included the freezing of assets.
There is reportedly suspicion that the company smuggled goods needed for the enrichment of uranium, the raw material in nuclear bombs, into North Korea.
Chinese authorities reportedly put the officers of this trading company under constraint in August. Although the authorities are reportedly conducting an investigation, there is a widespread view that they only took action when the United States confronted them with evidence.
The effectiveness of the U.S. financial sanctions is in large part due to the possibility that the flow of U.S. dollar funds can be traced through international fund-settlement networks such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
It is precisely because an overwhelming proportion of payments are carried out in U.S. dollars that a large share of smuggling and money laundering comes into contact with the currency. This makes it likely that the starting points of dark fund routes will be exposed and traced.
With an eye on getting into the SDR basket, China began operating the Cross-Border Interbank Payment System (CIPS), an international yuan payments network, in October 2015.
If North Korea were to take refuge within CIPS, and if the businesses that assist North Korea were able to make payments exclusively in the yuan, then the country's development of nuclear weapons would be even more hidden behind a veil. Financial sanctions would be hard to implement without China.
At the Canton Fair, a trade fair that opened on Oct. 15 in Guangzhou, Guangdong Province, I asked Chinese and foreign businesses whether they were using the yuan.
Some Chinese businesses are using the currency for payments when trading with companies in Southeast Asia and Russia. But non-Chinese businesses told me they use the U.S. dollar or the euro, rather than the yuan.
One overseas representative of a television manufacturer said, "Our company has no plans to deliberately use the yuan."
In contrast to its "dream," enthusiasm for the yuan is not particularly on the rise in China. The liberalization of financial markets will be indispensable if the currency is to become widely circulated. In China, however, the strengthening of regulations highlight a tendency of moving in the opposite direction.
People involved in finance indicate that the People's Bank of China recently instructed foreign-owned banks not to exchange their yuan for foreign currencies within China, but to instead take the currency outside the country to exchange it.
This is to keep the currency from depreciating further on the Shanghai yuan market, which is watched by the world. This reflects the government's strong desire to control the flow of funds and the yuan exchange rate.
In doing this, China has learned a lesson from the 1997 Asian currency crisis - when countries such as Thailand and South Korea, which liberalized capital transactions while their domestic economic bases were still fragile, suffered devastating damage as a result of currency short-selling by Western hedge funds.
With China's economy slowing, there is the risk of a selloff and a currency crash if yuan trading is liberalized. This would cause a massive outflow of funds from China and deal a heavy blow to its economy.
The sixth plenary session of the 18th Central Committee of the Communist Party of China came to a close on Oct. 27. At the session, President Xi announced more stringent disciplining of officials and was keen to maintain the government's influence. Xi has eyes on his second term, which begins next year, and wants to avoid any slipups in the management of the economy.
"The Chinese government is concerned that opening up capital transactions could send tremendous shock waves through the real estate and stock markets, so it is taking a consistently cautious approach to financial reform," said Prof. Xiang Songzuo of the Renmin University of China.
China's march toward currency supremacy may be slowing due to the Chinese Communist Party itself.