Sunday, February 5, 2012

The Making of Renminbi on Becoming a Global Currency

In 2002, I remember visiting the Leaning Tower of Pisa as a tourist. I was surprised to see a souvenir stand displaying a prominent sign: "Your Reminbi are welcome here" written in Chinese. This was significant on two counts. One, there were already significant amount of tourists from China visiting Europe and two, the Chinese yuan was becoming a global currency, albeit unofficially.

After the financial crisis of 2008, it became obvious that the dollar was on a long term path of declining value. While China has not been the only country to want to avoid holding on to too many dollars, China has been the busiest in entering currency swaps with its many trading partners. Bilateral currency swaps allow the participating nations to pay their trade invoices with their own currency and not with dollars.

Here is a compilation of swap agreements China has entered to date.
2008, December - South Korea, 180 bn yuan since extended
2009, January - Hong Kong, 200 bn yuan since doubled to 400 bn in Nov 2011
February - Malaysia, 80 bn yuan, extended 2/12 & increased to 180 bn yuan
March - Indonesia, 100 bn yuan
- Belarus, 20 bn yuan
- Argentina, 70 bn yuan
June - Brazil, no exact amount known
2010, June - Iceland, 3.5 bn yuan
July - Singapore, 150 bn yuan
2011, April - Uzbekistan, 0.7 bn yuan
- Mongolia, 5 bn yuan, doubled to 10 bn yuan in March 2012
June - Kazakstan, 70 bn yuan
December - Thailand, 70 bn yuan
Pakistan, 10 bn yuan
Japan, no exact amount known
2012, January - U.A.E., 35 bn yuan
February - Turkey, 10 bn yuan
March - Australia, 200 bn yuan

Other imminent swap deals currently under discussion include Nigeria and South Africa. The number of deals are likely to accelerate. As more countries hold and accept Reminbi, the more appealing the yuan will become as the alternative to holding too many dollars and more bilateral swap agreements will result.

Even if all the swap agreements were drawn down in full, there might be as much as two trillion yuan circulating outside of China. This might be enough liquidity for the renminbi to act as a de facto global currency but not enough to replace the dollar as the hard currency.

We can be sure, however, is that the dollar will cease to be the only global currency because no one will be satisfied with owning a currency that decrease in value with time. Japan has entered a currency swap deal not just with China but also with India, and Turkey with Malaysia. These are some examples how others are looking for ways of going around the dollar.

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