Monday, July 21, 2014

RMB developing quickly as major world currency

Just earlier this month, I posted a progress report on the rate of globalization of the Renminbi. In today's China Daily is an update that suggests a rate of development faster than expectation. (The headline of the CD article is the same as the title of my post.)

Last year 4.63 trillion yuan ($746 billion) were used in cross border trade settlement, up 57.5% from 2012. According to the article, the RMB is already the fifth most used international currency after the dollar, the Euro, the British pound and the Japanese yen, accounting for 2.5% of cross border trade settlement.

By the end of 2013, the amount of international bonds and bank notes denominated in RMB increased by nearly 25% YOY to a total worth $71.9 billion.

By year end 2013, China has entered currency swap agreements with 23 countries and regions.

Saturday, July 19, 2014

China is Practicing Paycheck Diplomacy

On the front page of recent issue of Wall Street Journal was an article titled, “An Arc of Instability Unseen Since the ‘70s.” The piece pointed out that In the past month alone, the U.S. has faced twin civil wars in Iraq and Syria, renewed fighting between Israel and the Palestinians, an electoral crisis in Afghanistan and ethnic strife on the edge of Russia, in Ukraine. The horror of shooting down a civilian 777 in Ukraine airspace followed shortly after the publication of the aforementioned article.

While Obama was busy fighting diplomatic fires around the world, China's president Xi Jinping was conducting his version of a globe trotting charm offensive. His first stop was Seoul, reciprocating an earlier visit to Beijing by South Korea president Park Geun-hye. The two leaders have met previously and have developed a warm personal friendship. Even more significantly, Xi's not stopping in Pyongyang to or from Seoul, is widely regarded as a deliberate downgrade of China's relations with North Korea.

The next step is up to Washington. If Obama is willing to seize this development as an opportunity to strike a deal with China and settle the Korean peninsula conundrum, he should begin a China-U.S. dialogue. The basics of the deal as I have suggested is peaceful reign of an unified Korea under the leadership of Seoul in exchange for American guarantee to vacate their military presence on the peninsula. (See this link.)

For the deal to reach a desired conclusion, a lot of conversation, negotiation and trust building would have to take place between the two superpowers. The plum prize is for Obama to go down in history as the first president to truly reap a peace dividend. Instead of instability, he would have brought stability in northeast Asia and no longer having to deal with one of Bush's axis of evil.

From Korea, Xi returned to Beijing long enough to welcome Germany Chancellor Angela Merkel to China before embarking on a week long jaunt to Latin America. First order of business was to attend a leaders' summit among the BRICS nations (Brazil, Russia, India, China and South Africa.)

Even before the formal summit conference, Xi renewed his acquaintance India's newly elected Prime Minister Narendra Modi. At this side meeting, the two leaders promise to strengthen the bilateral relations with frequent exchange of visits and explore Chinese participation in India's much needed infrastructure investments. No doubt, based on impressions from Modi's previous visits to China, he had to come away impressed by the scale of China's infrastructure investments.

A direct outcome of the BRICS summit was an agreement to establish the New Development Bank (NDB) for the expressed purpose of "mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies." The initial subscribed capital of $50 billion was to be shared equally by the five founding nations. 

The BRICS members account for nearly 30% of world's territory, more than 42% of world's population and 21% of world's GDP and their economy has been growing twice as fast as the developed countries. The formation of NDB will provide alternate view to the U.S. dominated World Bank and IMF in setting priorities for assisting emerging economies.

This was the sixth summit for BRICS. Outside observers were caught by surprise. They expected a lot of haggling and bargaining among the members before they could agree to the formation of NDB. Instead it was a done deal after two days of wide ranging discussion.

Outside of the summit venue, Xi was also busy networking with other leaders from Latin America. In one of the bi-lateral meetings, Xi raised the idea to Peru's President Ollanta Humala of building a transcontinental railroad from Peru to Brazil, linking the Pacific to the Atlantic with a vital trade corridor. Both leaders of Peru and Brazil were intrigued by Xi's idea and held high regard for China's expertise on building railroads in challenging environments.

Indeed after the conclusion of the BRICS summit, Xi stayed in Brazil for an official state visit. One of the items in the resulting memorandum of understanding between Xi and Brazil's President Dilma Rousseff was for China to assist Brazil in railway construction and make significant improvement in Brazil's infrastructure.

Another fallout of Xi's visit was the official establishment of the China-CELAC Forum. CELAC stands for Community of Latin American and Caribbean States. Canada and the U.S. are not members. In welcoming this new forum, Xi proposed a $20 billion fund to finance infrastructure projects and $10 billion credit line to the community of nations. 

China is already the largest trading partner to Brazil, Peru and Chile. Xi's goal is to help all the countries in the western hemisphere increase their ability to participate in international trade because of infrastructure improvements.

Xi has won high praise for his vision of how China can help developing countries help themselves. China is proposing closer cooperation via assistance in infrastructure development. Improvements in infrastructure leads to economic expansion. Expansion creates jobs. Xi's message translates into paycheck diplomacy.

Friday, July 11, 2014

Developments on the Renminbi Becoming a Reserve Currency

Sometime ago I began to track bilateral currency swap agreements between China and its trading partners. (See this blog and others that precede it.) The idea was that this trend could be the beginning of the Chinese yuan becoming a global currency and qualify as a reserve currency. Some recent developments provide some indicators of the progress the Renminbi has made towards this end.

Recent WSJ article reported on the increase use of Renminbi (RMB) instead of dollars to settle their cross border transactions. The US has surpassed Taiwan to become the fourth largest trading hub for the yuan, after Hong Kong, Singapore and U.K. To put this into perspective, Hong Kong accounts for 71% of all the world wide payments in yuan, Singapore 6.8% and London 5.9% while the U.S. only 2.6%.

The next day, China Daily followed with a related story on use of RMB. According to HSBC, about 17% of the U.S. companies settled their trade in RMB this year, nearly double the previous year. though it is below the global average of 22%. Poll of German companies revealed that 23% of the companies settled their accounts in RMB, a jump from mere 9% in 2013.

Reasons for for using the yuan include lower cost of doing business and better pricing. Not long ago, the Chinese seller would rather get paid in dollars but apparently no longer. It's a reflection of the confidence in the stability of the RMB that they now prefer to get paid in their own currency and not to have to worry about exchange rate fluctuations.

So is the RMB ready to take over as a preferred reserved currency? A paragraph from the WSJ article says not yet: Usage of the yuan has taken off globally. More than 18% of China's total trade is paid for in the currency, up from less than 1% give years ago, according to Bank of China Ltd. The Bank for International Settlements reported last year that the yuan is now the ninth most actively traded currency in the world.