Renminbi — Unrealistic Hard Currency Alternative

Renminbi — Unrealistic Hard Currency Alternative

By Heide B.  Malhotra
Epoch Times Staff
Created: Apr 26, 2011 Last Updated: Apr 26, 2011

NOT INTERNATIONAL: A Bank of China teller shows 100  renminbi (yuan) notes at its headquarters in Hong Kong, in this file photo.  According to the International Monetary Fund, the Chinese renminbi would not  appear to meet the criteria for being determined by the Fund to be a freely  usable currency. (Ted Aljibe/AFP/Getty Images)

China is prodding,  pushing with hints or blunt discussion, and using every type of trade method to  have the world accept internationalization of its currency, the renminbi (RMB).

“China will enhance the renminbi’s role in cross-border trade and  investment over the next five years, since country has witnessed progress in  internationalizing the currency,” according to an April article on the Xinhuanet  website, the Chinese Communist Party (CCP) mouthpiece.

Internationalization of a currency is important as a foreign exchange  payment tool as it facilitates trade when pricing and invoicing exports, and can  be used for investments and borrowing or lending in the international market,  according to a 2010 report “The Rise of the Redback” by Hong Kong and Shanghai  Bank Corp. (HSBC) Global Research, produced by HSBC Holdings plc. It is  important to note that HSBC is a Hong Kong-based bank, which is China’s first  special administrative region.

China is going after emerging and not  developed economies in its thrust for the RMB to become a household word.  China’s trade with emerging markets ranges around 55 percent, an 8 percent  increase since 2001.

“China has seen substantial growth in trade with  the emerging markets. The imports from these represent 70% of China’s total  imports, compared with 52 percent in the 1990s,” stated the HSBC report.

The People’s Bank of China (PBOC) has signed bilateral currency swap  agreements with central banks from Korea, Malaysia, Belarus, Indonesia,  Argentina, and Singapore. The HSBC report suggests that Thailand, Vietnam, and  the Philippines are not far behind in signing such agreements with the PBOC.

In 2010, RMB cross-border trading increased 13 times to $58.7 billion,  according to an April Xinhuanet article.

“The increase [in renminbi  cross-border trade] is attributed to China’s continued efforts to make the  currency more international, the country’s foreign-exchange regulator announced  in its 2010 China international payments report,” reported the China Daily in an  April article, another newspaper controlled by the CCP.

Global banks are  on the forefront in making the Chinese currency an international currency,  especially the HSBC and Standard Chartered. These banks are offering financial  incentives to anyone who will accept the RMB instead of the dollar or any other  currency when trading with China.

“HSBC and StanChart (Standard  Chartered) are among a slew of global banks—including Citigroup and  JPMorgan—holding roadshows across Asia, Europe and the US to promote the  renminbi to companies,” according to the World Threats website.

By  having the RMB internationalized and trade completed in the Chinese currency,  the People’s Republic of China (PRC) attempts to control the price of the traded  products, suggests an article on the World Threats website.

The World Threat article argues that “the PRC’s purpose to trade in Renminbi has two goals. … The PRC controls the value of what it trades. There is no revaluation required into a third party currency (dollars),” and “as the dollar loses value due to the poor economic conditions in the United States and the excessive supply of money, the Renminbi becomes a way of limiting the ability of the United States to afford to project power and maintain the instruments of power projection.”

RMB Internationalization—Not So Fast

“At this time, the Chinese renminbi would not appear to meet the criteria for  being determined by the Fund [International Monetary Fund] to be a freely usable  currency, which is also required for inclusion in the SDR [Special Drawing  Rights] basket,” advised the International Monetary Fund (IMF) in its October  2010 regular five-year review concerning the interest rate basket.

The SDR, set up by the IMF in 1969, is a monetary unit of  international reserve assets, and its worth is based on the combined value or  basket of four currencies: the U.S. dollar, Euro, Japanese yen, and Pound  sterling. This basket has remained unchanged since 1999, when the Euro was  included, and the German DM and French francs were replaced by the Euro. The SDR  is not a tradable currency, but represents a possible claim against a fund, set  up by contributing countries.

Read More…SDR is a Low-cost  Alternative to Debt Financing

The SDR is a low-cost alternative  to debt financing, where interest rates are set on a weekly basis. The SDR is  reviewed about every five years for inclusion or exclusion into the basket of  currencies by analyzing a five-year period, with the latest result published in  November 2010 and effective January 1, 2011.

The Chinese believe that a  major step toward the RMB being widely accepted as an international instrument  would be inclusion in the SDR basket.

The IMF agrees that China has  achieved fourth largest exporter status, which is a major step. But to be  included in the SDR basket, China’s currency must be a widely traded and a  freely usable currency.

“Available indicators suggest the Chinese  renminbi is not yet widely used in international transactions or widely traded  in the principal exchange markets, and would thus not appear to meet the  criteria for being determined by the Fund to be a freely usable currency at this  time,” stated the IMF review report.

International use of the RMB has  increased to $70.6 billion by August 2010 from $3.6 billion at December of 2009.  But the IMF argues that the majority of this earning came from imports and not  from exports, and the utilization of the RMB was only 1 percent of China’s total  export trade.

In addition, the RMB is not freely usable. The PRC keeps  tight control over RMB and foreign currency transactions. The government  requires that all foreign earnings must be brought into China and kept in a  Chinese bank. Foreign borrowing activities are governed by a mandatory ceiling  for all but short-term borrowings.

Also, China keeps tight control over  capital assets. Foreigners are rarely allowed to purchase and sell assets, which  affects the freely tradable criteria.

Renminbi Can’t Beat Dollar

“Contrary to the increasingly shared belief that the Chinese are coming, the  dollar’s status is not in danger nor is the renminbi a realistic hard currency  alternative,” said Mark Sunshine, in a March report published on the Seeking  Alpha website.

Economists claim that the U.S. Department of Treasury has  gone on a money-printing spree, which could result in inflationary pressure. In  real numbers, the U.S. money-printing five-year growth rate amounted to 32.20  percent.

On the other hand, China does not halt the renminbi printing  presses, and its five-year growth rate is 142.96 percent. The Sunshine report  suggests this money-printing activity resulted in run-away domestic inflation.

China’s citizens may hold only limited foreign currency and thus  have to face constant devaluation of the RMB. They have no choice, but  foreigners have a choice. Why would they want to hold a currency that becomes  worthless over time? Sunshine said that Chinese citizens would rather hold  dollars than the RMB, were it not for the government’s  prohibition.

“Economists and pundits predicting the rise of the renminbi  need to understand that for the Chinese currency to assume the status of a  reserve currency people all around the world—Chinese citizens included—have to  want to own the currency. Forcing people to own it is not a stable or acceptable  substitute,” Sunshine said in his article.

To make a last argument for  the impossibility of the RMB replacing the U.S. dollar, Sunshine said, “The  dollar is the world’s reserve currency because foreigners want to own and  transact business in dollars more than any other currency.”



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