The Internationalization Of The Yuan

The students at Far Hills Country Day School (“FHCDS”) were excited to finally be able to open the red packets, or “hongbaos,” that we had distributed before my presentation. They were even more excited to find the Chinese money inside. Most of the packets contained a 1 yuan bill, but a few lucky kids found 5, 10, 20 or 50 yuan bills inside. The really lucky ones, though, were thrilled to find a 100 yuan “redback,” in their packet. They were even more thrilled when they learned that the bill is worth approximately $15, a fortune for almost any kid under 12.

That, of course, raised an interesting question, which even the pre-kindergarten group was astute enough to ask me in the question and answer period that followed. “Where can I spend my Chinese money?” they all asked. Other than in China, I told them, the best place was probably Chinatown in New York.

In another year or so, they and the growing numbers of renminbi holders around the world will likely have even more places to exchange the yuan. The internationalization of the yuan is picking up speed, and this is an evolving story that we have been tracking.

In 2010, “dim sum bonds” were introduced to help recycle the hundreds of billions of renminbi that sit in offshore markets like Hong Kong. Quite simply, a dim sum bond is a Chinese yuan-denominated bond that is issued in Hong Kong by an international company that enables the company to obtain renminbi to fund its operations in China, provided that the issuer receives approval from Chinese regulators to repatriate the yuan that it raises. The issuance of dim sum bonds is increasing rapidly due to the growing amount of RMB that is now circulating in the global economy. At the end of April, there was an estimated RMB 510 billion ($81.0 billion) on deposit in Hong Kong banks.

In November 2010, Russian Prime Minister Vladimir Putin and Chinese Premier Wen Jiabao caused a great deal of discussion in financial markets when they announced that Russia and China had decided to use their own national currencies for bilateral trade, instead of the U.S. dollar. The yuan started trading against the ruble in the Chinese bank market in Shanghai immediately, and in December 2010, began trading on the Moscow Interbank Currency Exchange. This is the first time that the yuan has traded outside of China and Hong Kong.

In October 2011, we noted that China is considering a proposal to set up a regional bank to help its small and medium enterprises invest in Southeast Asian neighbors and fund infrastructure projects in an effort to buy goodwill in the region. The bank will also settle China-ASEAN trade in yuan, another step in China’s long campaign to make the yuan a regional currency. At that time, we also suggested that China might come to the aid of Europe, but if it did, China might insist that its contribution be at least partly denominated in renminbi.

In January of this year, China and the United Arab Emirates signed a three-year currency swap agreement worth 35 billion yuan ($5.54 billion) that the People’s Bank of China said would boost two-way trade and investment. The agreement was signed in Dubai and represents one more in a string of arrangements to facilitate greater use of China’s yuan in international trade.

The latest of these arrangements was put in place on Tuesday between the People’s Bank of China and Turkey’s Central Bank. Chinese Vice President Xi Jinping and Turkish President Abdullah Gul oversaw the signing of a three-year currency swap deal worth $1.6 billion (€1.2 billion) to enable bilateral trade in the local currencies of the two countries.

In its November, 2010 report on the subject, HSBC predicted that at least half of China’s trade flows with emerging market countries could be settled in renminbi within three to five years, from less than 3 percent in 2010. In other words, HSBC was predicting that nearly $2 trillion worth of trade flows could be settled in renminbi annually, making it one of the top three global trading currencies. If the current trends continue, HSBC may have underestimated the extent to which the renminbi will be internationalized by then.

My advice to my new friends at FHCDS: “Hang on to your Chinese money!”

Enhanced by Zemanta

No comments yet... Be the first to leave a reply!