Showing posts with label Renmimbi. Show all posts

Monday, 22 July 2024

De-dollarization, the Belt and Road Initiative, and the Future of the Chinese Yuan

For a while, the globalization of the yuan seemed inevitable. In this article, we explore the recent developments regarding the Chinese currency, showing how the speculative attack of 2016 has shifted the priorities of Chinese authorities. Instead of a full-blown de-dollarization strategy and Belt and Road Initiative, China now focuses on developing cross-border yuan-denominated trade settlement systems. State-owned companies have a limited ability to purchase foreign companies as in the past, and the government has stopped making voluminous loans to poor countries; China now pursues tight controls over capital outflows and a slightly more volatile Renminbi.

Rodrigo Zeidan

April 18, 2024

https://gjia.georgetown.edu/2024/04/18/de-dollarization-the-belt-and-road-initiative-and-the-future-of-the-chinese-yuan/

Introduction

China no longer seeks a global yuan due to the actions of state-owned companies and Chinese individuals moving money abroad. In 2013, the Belt and Road Initiative (BRI) was organized to expel US dollars from the Chinese economy and limit the need for market interventions. However, Chinese state-owned companies initiated a speculative attack that forced the hand of the People’s Bank of China (PBOC). Chinese authorities propped up capital markets, restricting households that sought to move capital overseas. Meanwhile, the United States has increasingly weaponized the global greenback, and the increasing threat of US sanctions has limited the options of Chinese policymakers.

Central to the yuan’s future is whether China will attempt to de-dollarize the global economy or merely hedge against potential US sanctions. China is constrained to the latter for the next few years. Attempting to de-dollarize would require China to maintain free capital markets. However, lessons from 2015 suggest that doing so would risk another financial crisis in China. Still, China should continue to build central bank agreements for cross-border trade settlements in Renminbi to counteract the US dollar’s sanctioning power.

Strict Capital Controls Post-2008

In 2008, China maintained an undervalued peg to the US dollar; the Chinese government artificially devalued the yuan to induce higher exports. As the economy recovered from the Great Recession in 2009 and 2010, the PBOC allowed the Renminbi to appreciate as a “crawling peg” (Figure 1).

Figure 1 – Chinese Yuan Renminbi to US Dollar Spot Exchange Rate, annually.

Source: Board of Governors of the Federal Reserve System (U.S.).

The Chinese currency remained undervalued relative to true market value, its “shadow price,” as the PBOC made massive purchases of foreign currencies, mainly US dollars. Chinese foreign reserves climbed inexorably until the country had accumulated almost USD 4 trillion in June 2014 (Figure 2).

Figure 2 – China Foreign Exchange Reserves (USD trillion)

Source: International Monetary Fund.

Globalized Yuan Aspirations

For the first five years after the great financial crisis, Chinese foreign reserves doubled from USD 2 trillion to 4 trillion. But starting in 2013, the Chinese government generated considerable demand for the yuan by launching the Belt and Road Initiative while quickly selling US dollars. With loans totaling over USD 120 billion, the BRI-backed projects ranged from highways to power plants. From 2000 to 2013, net capital inflows to China averaged USD 800 billion annually and remained at similarly high levels in subsequent years (Figure 2). The Chinese government sought to internationalize the yuan, culminating with the Chinese currency’s inclusion in the Special Drawing Rights (SDR), the IMF’s international reserve asset.[1] China, flush with foreign investment, hoped the yuan would replace the US dollar as the global reserve currency.

Governments are typically faced with a trilemma. They can choose at most two of three policies: monetary policy autonomy, fixed exchange rates, and free capital flows. The United States, Japan, Brazil, and India, among others, maintain monetary policy autonomy and free capital flows but lack a fixed exchange rate regime. Eurozone countries abandoned monetary autonomy (outsourced to the European Central Bank) to create a euro-to-euro peg between their countries and allow money to flow between these economies unimpeded. Historically, China has opted for monetary policy autonomy and a fixed exchange rate with the US dollar (and, later, with several currencies). According to the trilemma, capital should not move freely in and out of the country—that was the reality for Chinese consumers and companies throughout the 2000s due to the country’s strict capital controls.

Pre-2013 trends fueled Chinese global currency aspirations. With demand for the yuan growing rapidly, Chinese authorities pursued yuan internationalization and more free capital markets, ignoring the trilemma. China believed that seemingly infinite reserves would preclude speculative attacks that commonly cause the downfall of governments that try to maintain fixed exchange rate regimes, monetary policy autonomy, and open capital accounts. Authorities thought it impossible that enough capital would leave the Chinese economy to deplete its reserves.

Economic Crisis and China’s Response

However, in early 2015, the Federal Reserve raised US interest rates for the first time since 2008. Simultaneously, expectations for the Chinese economy turned. A consensus formed that the Chinese economy would suffer a hard landing. Thus, the yuan became overvalued relative to its shadow price. Capital started flowing out of China rapidly, leading to a speculative attack on the currency as investors sold yuan assets. In 2016, households sought to transfer as much money as possible when their limits for sending US dollars to foreign accounts reset. Almost USD 1 trillion left the Chinese economy in 2016. With restrictions on capital outflows lifted and ample credit from local banks, state-owned companies purchased global businesses in deals totaling USD 200 billion. Chinese 2016 outbound mergers and acquisitions (M&A) reached almost four times as large as the previous year (Figure 3). Chinese companies were effectively betting on the yuan’s devaluation by buying foreign businesses. Thus, a speculative attack marred authorities’s intentions of a global Renminbi.

Figure 3 – Outbound M&A deal value by companies from China between 2015 and 2022 (in billions USD)

Source: PWC, 2023.

In August 2016, the PBOC took action against the speculative attack. It allowed the yuan to devalue by over 3 percent daily for two consecutive days but tightened capital controls. In September, the government introduced a 100,000 yuan annual limit on cash withdrawals from foreign ATMs and restricted underground transfers. But most critically, the PBOC tightened capital controls for private and public companies. This caused the value of outbound M&A to fall by 90 percent from 2016 to 2023, as Chinese companies had limited access to debt to finance the acquisition of Western firms.

Nevertheless, Chinese authorities did not simply return to a currency system with a non-volatile exchange rate, tight capital controls, and monetary autonomy. Today, the yuan is much closer to a free-floating currency. Before 2016, the yuan fluctuated little, but it now varies according to the business cycle. For instance, the Chinese currency devalued at the beginning of the 2020 COVID-19 pandemic, appreciated when restrictions in the country eased, and devalued again as Western central banks lifted interest rates (Figure 1). Since the speculative attack in 2016, China’s foreign reserves have remained almost constant at USD 3 trillion (Figure 2). Instead of intervening to keep the yuan under certain thresholds, the PBOC has allowed it to appreciate and depreciate according to the relative amounts of foreign currency entering or leaving China.

After the speculative attack of 2015, the Chinese government changed its currency system, adopting a dirty floating exchange rate system, not the strict peg of the early 2000s. Despite China’s claims that it wants to de-dollarize, the PBOC is unlikely to entirely abandon capital controls. The fear of currency volatility destabilizing the Chinese economy will likely trump the desire of Chinese policymakers to make the yuan a global currency. The speculative attack from individual agents, consumers, and companies ended hopes of a genuine Renminbi standard. It also required Chinese authorities to fundamentally change the BRI. Since 2017, annual BRI disbursements have declined substantially and are now almost exclusively lightly subsidized loans for Chinese companies to build infrastructure in foreign countries. De-dollarization is still a goal, but authorities are handcuffed by their preference for capital controls.

Chinese entities will continue to have to cope with restricted access to foreign currency. Capital controls make local financial markets more resilient to crises but less efficient. Capital controls restrict foreign companies’ routine business operations, such as receiving payments from Chinese customers as well as paying dividends and royalties to Chinese stakeholders. More informed investors will continue to pursue the few avenues for sending money abroad, such as through the Qualified Domestic Institutional Investor (QDII) program. All the energy spent procuring ways to send money abroad saps Chinese productivity.

China’s Strategy Moving Forward

In the past, Chinese authorities believed a global alternative to the dollar system was possible. However, today, China focuses almost exclusively on promoting the yuan through trade. Instead of being paid in US dollars, exporters are paid in their local currency with trade being settled when Chinese importers buy local products. Thus, an Argentinian exporter may be paid in pesos, while a Chinese exporter to Argentina is paid in yuan, bypassing US dollars. Yet, without a commitment to free capital flows, China cannot pursue de-dollarization moving forward. Authorities must take a wait-and-see approach unless economic priorities change.

Presently, de-dollarization is, in essence, a risk management measure for China. The United States can sanction institutions by limiting their ability to access international payments in US dollars, an option no other country shares. (Only Europe and the United Kingdom come close with their abilities to limit transactions in pounds and euros). China’s current stance limits the potential damage to the Chinese economy from possible US sanctions. However, they do not match past de-dollarization goals. Due to the risk posed by potential US sanctions, Chinese authorities should continue to devise measures to limit the dollar’s potential as a weapon if the economic conflict with the United States intensifies. Still, China cannot allow capital to flow entirely freely into its economy without risking another domestic currency crisis.

…

Rodrigo Zeidan is a Professor of Practice of Business and Finance at NYU Shanghai and an Affiliate Professor at Fundacao Dom Cabral. Professor Zeidan is the author of Economics of Global Business (MIT Press), The General Model of Working Capital Management (Palgrave Macmillan), and five other books. His research has also been published in some of the top journals in finance and economics, such as the Journal of Corporate Finance, Nature Sustainability, Energy Economics, Harvard Business Review, International Journal of Production Economics, and Journal of Business Ethics. His recent research focuses on Sustainable Finance alongside Corporate Finance and Industrial Economics issues. Rodrigo has a biweekly column at Folha de S. Paulo, the largest Brazilian newspaper. He has written extensively for international media outlets, including the New York New Times, CNN, the World Economic Forum, Bloomberg, and Americas Quarterly. Rodrigo is also Associate Editor of the Journal of Economic Surveys, Journal of Sustainable Finance & Investment, and the Brazilian Review of Finance. He holds a position as a Senior Scholar at the Center for Sustainable Business, NYU Stern.

[1] The SDR is not a currency, but its value is based on a basket of five currencies—the US dollar, the euro, the Chinese Renminbi, the Japanese yen, and the British pound sterling.

Image credit: Eric Prouzet via Unsplash.

Georgetown University

Georgetown Journal of International Affairs
ICC 301 · 37th and O Streets
NW Washington, D.C. 20057

https://gjia.georgetown.edu/2024/04/18/de-dollarization-the-belt-and-road-initiative-and-the-future-of-the-chinese-yuan/

The first issue of GJIA was published in the spring of 2000. Since then, GJIA has served as a resource for scholars, business leaders, policy makers, and students of international relations alike, cultivating a dialogue accessible to those with all levels of knowledge about foreign affairs and international politics.

GJIA publishes a peer-reviewed edition sold online, indexed in academic databases, and distributed in bookstores around the country. GJIA also publishes shorter pieces on our website on a rolling basis.

Monday, 4 July 2022

China's yuan is making headway a global reserve currency, with 85% of central banks keen on holding the asset

Central banks are increasingly keen to hold China's yuan as a reserve currency, according to a new survey.
Some 85% of central bank reserve managers said they already hold or are interested in owning the yuan.

HARRY ROBERTSON

JUL 4, 2022, 15:44 IST

Central banks are increasingly keen on the yuan, according to a new survey.Lucas Schifres/Getty Images

Central banks are increasingly keen to hold China's yuan as a reserve currency, as the country's growing economic and political power threatens to erode the US dollar's global dominance.

Some 85% of central banks said they are invested, or are considering investing in, China's yuan in UBS Asset Management's annual reserve manager survey, released Friday. That's up from 81% a year earlier.

Foreign exchange managers at central banks are on average looking to hold 5.8% of their reserves in the yuan in 10 years' time, up from 5.7% last year. That would be a sharp increase from the 2.9% level reported by the International Monetary Fund last week.

The US and its allies' freezing of Russia's foreign exchange reserves in response to the invasion of Ukraine has driven speculation that countries will diversify away from the dollar, so as to be less exposed to Washington's power over the global financial system.

Foreign exchange reserves are used to protect domestic currencies and to deploy at times of crisis. UBS surveyed 30 top central banks between April and June.

Central banks' average share of US dollar holdings was 63% as of June 2022, the survey showed, down from 69% in the previous year. However, UBS said fewer Latin American banks, which typically hold more dollars, were surveyed this year.

Russia's invasion of Ukraine and Beijing's close relationship with Moscow — as well as China's breakneck economic growth in recent years — has increased talk about a "multipolar" world, in which the US is no longer the overwhelmingly dominant force.

More than 81% of respondents to the UBS survey said China's yuan, also called the renminbi, would benefit from a shift to a "multipolar" world. Some 46% said the dollar would benefit, in a sign of the asset's appeal during times of economic or geopolitical tension.

"The renminbi continues its steady rise to reserve currency status," UBS' analysts said in the report.

However, despite the increased interest in the yuan, the currency remains far away from challenging the dollar for the top spot in global reserves.

Some analysts have said Beijing's autocratic leadership makes holding any Chinese assets risky. Meanwhile, doubts have grown about the economy over the last year as the property sector has wobbled and President Xi Jinping's zero-COVID policy has hampered growth.

Investors have snapped up the dollar this year as the Federal Reserve has hiked interest rates, pushing up US bond yields. The dollar index has risen almost 10% this year to around 105, close to its highest level in 20 years.

https://www.businessinsider.in/stock-market/news/chinas-yuan-is-making-headway-a-global-reserve-currency-with-85-of-central-banks-keen-on-holding-the-asset/articleshow/92652273.cms

Sunday, 15 May 2022

How the Yuan Could Become a Global Currency

China's Plan to Replace the U.S. Dollar

KIMBERLY AMADEO

Updated May 15, 2022

REVIEWED BY

ROBERT C. KELLY

China wants its currency, the yuan, to replace the U.S. dollar as the world's global currency. That would give it more control over its economy.

As China's economic might grows, it's taking steps to make that happen. Could we see a switch from a greenback- to a redback-dominated world? If so, how and when would that happen? What would be the consequences?

Key Takeaways

Currently the U.S. dollar is the world's global currency, which affords the United States economic and political advantage.
Before the yuan can become a global currency, it must first become a reserve currency held by central banks around the world.
Among the benefits China would enjoy are lower trade costs, greater demand for the yuan worldwide, and less concern about the value of the U.S. dollar in relation to the yuan.

What Must Happen First

China is working hard to make the yuan the next global currency. Although presently a reserve currency, the yuan can’t upstage the U.S. dollar without several important scenarios taking place first, including:

Central banks around the world choose to keep a total of at least $700 billion worth of yuan in foreign exchange reserves
The People's Bank of China (PBOC) allows free trade of the yuan and relaxes its peg to the U.S. dollar
The PBOC becomes straightforward about its future intentions with the yuan
China’s financial markets turn transparent
Chinese monetary policies are perceived as stable
The yuan acquires the U.S. dollar’s reputation of stability, which is backed by the enormity and liquidity of U.S. Treasurys1

How China Benefits from the Yuan as a Reserve Currency

Before the yuan can become a global currency, it must first be successful as a reserve currency. A reserve currency is one that is held in large amounts by governments and institutions as a supplement to national currencies.

Once the yuan is successfully established as a reserve currency, it would give China the following benefits:

More international contracts could be priced in yuan, which would mean China would not have to worry so much about the dollar's value.
All central banks would have to hold yuan as part of their foreign exchange reserves, which would place the yuan in higher demand and lower interest rates for bonds denominated in yuan.
Chinese exporters would have lower borrowing costs.
China would have more economic clout in relation to the United States.
It would support President Jinping's economic reforms.

How the Yuan Is Becoming a Reserve Currency

On Dec. 1, 2015, the International Monetary Fund (IMF) announced that it awarded the yuan status as a reserve currency.2 The IMF added the yuan to its Special Drawing Right basket on Oct. 1, 2016. This basket currently includes the euro, Japanese yen, British pound, and U.S. dollar.3

Why did the IMF make this decision? China’s leaders want to improve the standard of living and increase its economic output. The Chinese have pegged the yuan to the U.S. dollar but via an adjustable peg, or “managed peg.”

This floating peg has generally been on a downward trend since 2015, implying that the yuan has been steadily devaluing against the dollar, thus making Chinese exports relatively more competitive against dollar prices around the world. That allowed China's economic growth to soar thanks to low-cost exports to the United States.4

As a result, China's share of international trade and gross domestic product grew to around 10%.5 This has been a source of trade friction between China and the U.S.

As international trade grew, so did the yuan's popularity. In August 2015, it became the fourth most-used currency in the world. It rose from 12th position in just three years. It surpassed the Japanese yen, the Canadian dollar, and the Australian dollar.6

Central banks should increase their foreign exchange reserves of yuan to provide funds for that level of trade. Central banks alone should purchase about $700 billion worth of yuan. But banks never purchased all the euros they should have, even when the European Union was the world's largest economy. Most international transactions are still done in U.S. dollars, even though its trade has dropped.1

The IMF requires China to liberalize its capital markets.3 It should allow the yuan to be freely traded on foreign exchange markets. That allows central banks to hold it as a reserve currency. For that to happen, China's central bank must relax the yuan's peg to the dollar.

China must have clearer communications about its future actions regarding the yuan. That's what the Federal Reserve does for the dollar at each of its eight Federal Open Market Committee (FOMC) meetings.7

In August 2015, the PBOC relaxed the yuan to dollar conversion rate.8

Instead of a fixed exchange rate, the PBOC would set the yuan's value to its closing value on the previous day. Instead of rising, as many expected, the yuan fell 3% over the next two days.9

The PBOC stabilized the rate. It now has the freedom to allow the yuan to be a stronger tool in monetary policy. The drop also silenced critics of China's reforms, many of whom were members of the U.S. Congress.4

In December 2015, the Bank announced it would begin to shift the dollar peg to a basket of currencies. That basket includes the dollar, euro, yen, and 10 other currencies.10

The Yuan Is Slowly Being Traded in Foreign Markets

Chinese leaders are beginning to make it easier to trade the yuan in foreign exchange markets. To do this risks more open financial and political systems. On March 23, 2015, China backed the Renminbi Trading Hub for the Americas. The renminbi is the name of China's currency system (yuan is the name of each individual unit of currency). That makes it easier for North American companies to conduct yuan transactions in Canadian banks. China opened up similar trading hubs in Singapore and London.11

Former New York City Mayor Michael Bloomberg is Chair of the Working Group on U.S. RMB Trading and Clearing. It is creating a renminbi trading center in the United States. The group includes former U.S. Treasury Secretaries Hank Paulson and Timothy Geithner. Such a center would lower costs for U.S. companies trading with China. It would also allow U.S. financial companies to offer yuan-denominated hedges and other derivatives.12

On June 8, 2016, China granted the United States a quota of 250 billion yuan, the equivalent of $38 billion, under China's Renminbi Qualified Foreign Institutional Investor program.1314

Can the Yuan Replace the Dollar?

The level of trade is not the only reason the U.S. dollar is the world's reserve currency. The strength of the U.S. economy instills trust. Most important are the transparency of U.S. financial markets and the stability of its monetary policy.

On the other hand, Stuart Oakley, managing director of Nomura, pointed out in a 2013 article that China owns $4 trillion to $5 trillion of unallocated central bank reserves and these could be in yuan. As more bilateral swap lines are set up and China moves further down its path of capital market liberalization, central banks' appetite to own this currency will grow.1

Could China's ambition to make the yuan the world's currency lead to a dollar collapse? Probably not. Instead, it will be a long, slow process that results in a dollar decline, not a collapse.

https://www.thebalance.com/yuan-reserve-currency-to-global-currency-3970465

Kimberly Amadeo

EXPERTISE

U.S. and world economies

CURRENTLY

President, World Money Watch

EDUCATION

MIT Sloan School of Management

Highlights

Over 20 years of senior-level corporate experience in economic analysis and business strategy
Has a master's in management from the Sloan School of Business at MIT
Expert on U.S. and world economies

Experience

Kimberly Amadeo is president of World Money Watch, where she shares her expertise on U.S. and world economies, as well as investing. The company produces publications about the global economy that are easy to understand, succinct, and full of practical information. Examples include "The Ultimate Obamacare Handbook" published in 2015, and "Beyond the Great Recession" published in 2010.

Prior to reaching a milestone of 20 years of experience in economic analysis and business strategy, Kimberly received her master's in business administration from MIT's Sloan School of Management.

Kimberly has been featured as an expert on the PBS program "To the Contrary" discussing unemployment, as well as Varney & Co., a news talk show on the Fox Business Network, NBC News, and CCTV America. Other features where Kimberly can be heard discussing the state of the economy include U.S. News and World Report, The Dallas Morning News, Forbes, Industry Week, and the Washington Post.

Education

Amadeo has a master's in business administration from MIT's Sloan School of Management

Latest From Kimberly Amadeo

https://www.thebalance.com/kimberly-amadeo-3305455

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