Renminbi — Unrealistic Hard Currency Alternative
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.”