China “serious about the plan to internationalise” Yuan

Chinese vice-premier Wang Qishan has been appointed to lead a taskforce to make the renminbi the currency of choice for trade settlements, especially with regional trading partners. HSBC economist Qu Hongbin believes this latest salvo in China’s intensifying efforts to ditch the dollar demonstrates the Chinese are moving sooner than most expect to internationalise their domestic currency.

Hu Xiaolian, vice-governor of the People’s Bank of China, is being enlisted to head the research division of the taskforce. Officials from six other central departments have also been drafted to the taskforce.

"China really wants to give a big push in internationalising the renminbi," notes Qu. "Of course it would be a multi-year, long-term process". Still, he adds, the initial stage of expanding the renminbi’s role in trade settlement could be "faster than many expect".

Since China recently became the world’s largest exporter and is the second-largest trading country, expanding the role of renminbi in cross-border trade settlement is "simply a catch-up game," says Qu. "I won’t be surprised if, in the next three to five years, around half of China’s annual cross-border trade is settled in renminbi rather than US dollars."

Given the high volume of China’s trade, even if half of its trade flows are settled in renminbi, that would make it "one of top three international currencies in the world." This, he adds, "will have a substantial impact, not only on China but also the global economy."

I still believe there is no currency that can replace the dollar as the world’s reserve currency in the next few years.  But, the Chinese certainly are hedging their bets.  Eventually, these efforts will bear fruit.

More here.

12 Comments
  1. aitrader says

    “Eventually, these efforts will bear fruit.”

    Hmmm, not sure if I can agree. Japan will resist any attempt by China to control the region. I doubt Taiwan will ever accept the Yuan as a reserve currency. Many smaller Asian countries regard China with suspicion after their annexation of Tibet and Mongolia and their stance on Taiwan. The “greater China” policy where the Chinese annex areas that were formerly vassal states when China was an empire makes many Asian countries very uneasy regarding their giant neighbor to the North.

    I think the Chinese will try to push the Yuan, by hook or by crook, as a regional trading currency but ultimately will push many Asian countries into an anti-China trading alliance that will do more harm than good for the Chinese in the long run.

  2. aitrader says

    “Eventually, these efforts will bear fruit.”

    Hmmm, not sure if I can agree. Japan will resist any attempt by China to control the region. I doubt Taiwan will ever accept the Yuan as a reserve currency. Many smaller Asian countries regard China with suspicion after their annexation of Tibet and Mongolia and their stance on Taiwan. The “greater China” policy where the Chinese annex areas that were formerly vassal states when China was an empire makes many Asian countries very uneasy regarding their giant neighbor to the North.

    I think the Chinese will try to push the Yuan, by hook or by crook, as a regional trading currency but ultimately will push many Asian countries into an anti-China trading alliance that will do more harm than good for the Chinese in the long run.

    ————————————

    Addendum:

    Some decidedly un-green weeds re:China,

    “Beijing’s derivative default stance rattles banks”

    http://www.reuters.com/article/wtUSInvestingNews/idUSSP47327420090831

    1. Edward Harrison says

      The Chinese may get a larger basket of currencies and commodities to replace the dollar as the reserve currencies. However, this is some while off. I do not mean to say here that the Chinese are seeking to make the Yuan a reserve currency.

      I do think that, like the Japanese, who were not well-regarded by many Asians after the War, the Chinese can, in time, start doing bilateral trade in their currency. Economic concerns will trump political ones eventually.

      As for the connection to the dollar, here’s what I wrote on the article’s page at Seeking Alpha:

      The Chinese are doing long-term planning and nothing more in my view. The world they see eventually would be one in which the Yuan is fully exchangeable, free-floating, and often used in bilateral trade as the U.S. Dollar, Euro, Pound, or Swiss Franc are.

      At present, none of these is true. The question is: how quickly can they get there and what does this mean about the U.S. dollar’s status? I take an agnostic view on this question because the Chinese are more concerned with the benefits of having an internationally-accepted currency without the negatives (wild valuation swings, capital flight, etc)

      Americans tend to view this as a threat to the U.S. dollar, and it is to the degree it is precipitated by a growing distaste for dollar assets. But, that does not mean that the Chinese will get their international currency any time soon. Right now, they are laying the groundwork, much as the EU did for the formation of the Euro.

  3. Anonymous says

    “I still believe there is no currency that can replace the dollar as the world’s reserve currency in the next few years. ”

    Why?

    1. Edward Harrison says

      It is simply not politically realistic to think so. All of these things take time to plan and implement. Right now, there are discussions here and there about reserve currencies, but it has yet to become an issue taken up by the G-7. Without any meaningful policy discussion, the issue is not even in what would be considered the planning stages. As an example, after Bretton Woods collapsed, it took five years before all currencies became freely floating.

      Moreover, no currency now used is adequate to replace the dollar – not the Euro (too new), not the Yuan (not used internationally, not fully exchangeable, not free-floating), and none of the others because they are too small. More likely, if a change occurs, it will be from the dollar to a basket of currencies/commodities.

      When this could happen is pure speculation.

      1. Anonymous says

        Thanks, I truly pray your right! Take care

  4. Kinukawa says

    Thank you for having picked up this topic on your blog.

    When do you think China would implement internetionalization of renminbi? I am afraid that I do not remember but it should be around the same time when Shanghai is expected to be an international financial center, which is 2020.

    For that purpose China should make it possible that non-resident of China could freely transfer renminbi funds from his or her own account with domestic bank to other accounts and that renminbi could be traded in the offshore interebank foreign exchange market.

    As an interim measure, currency basket composed of currencies in the region could be possible as suggested and proposed by some researchers. For renminbi to be a component of the basket, it needs to be more internationalized than it is now.

    1. Edward Harrison says

      Bilateral trade agreements probably come first as this will get the renminbi in widespread use. Simultaneously comes a wider trading-band followed by a managed float. Eventually, the Chinese will freely float and allow convertibility.

      How long this takes is anyone’s guess. Five years, ten? It is certainly a long way off.

  5. Polorise says

    Edward,

    would you be intrested in contributing to our site on Emerging / Developing Markets ?

    http://www.mystockvoice.com

    similar to other syndication platforms, we provide pic, bio & links to original articles.

    Best regards

    Pavel

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