China wants a new global role for its currency. But the vision of its leaders remains mired in the past
It didn’t take long for China to secure the first step of the podium. Barely a few hours after the London Olympics’ opening ceremony, the country had already surged to the top of the medal table. But the British capital may well witness Beijing’s rise in yet another discipline. One of a few offshore renminbi trading hubs, London is at the front row of China’s efforts to internationalise the redback – and could soon see the currency assume a leading role as a global payment, value and reserve unit.
Figures suggest the yuan is already off the starting blocks. From next to nothing twelve months ago, the volume of cross-border trade settled in redbacks has surged to almost Rmb957bn ($146bn) in the first half of this year. Renminbi deposits in Hong-Kong, at Rmb620bn ($97bn) in 2011, are up tenfold since 2008. Beijing now has more than Rmb1.5tn in swap lines with other central banks, and issuance of ‘dim sum’ bonds by international companies reached a record Rmb88.7bn last year.
But the currency’s ascent may not be as impressive as it seems. According to Yu Yongding, an economist and adviser to the Chinese government, the bulk of yuan trade actually takes place between Chinese companies and their subsidiaries – generally for purposes of financial arbitrage. Swift, the global payment network, reckons the currency makes up only 0.34 per cent of all international payments. And offshore renminbi deposits, despite starting from a very low base, have steadily declined over the past six months.
Part of the problem lies in China’s erratic currency policy. Last Wednesday its central bank announced that Hong Kong non-residents would be allowed to convert unlimited amounts of renminbi, the latest of successive steps towards a loosening of currency controls. But it then spent much of the week guiding the yuan downward, pushing the currency to its lowest level of the year against the US dollar. Foreign central banks, international companies and expatriates previously keen on the redback have started to reconsider their bets.
The central bank’s policy shift may prove temporary: similar pressures to weaken the yuan, last observed in May, were rapidly reversed. But the fumbling still shows how far China remains from abandoning decade-old reflexes. It also questions whether its rulers will ever be willing to further open its current accounts, and meaningfully relax their grip on the country’s economy. They still see a global yuan as a means to keep control on their financial destiny – thanks to a lesser dependence on the US dollar – and not as a step towards a reform of their economic model.
Beijing’s position may soften a little after this year’s sensitive leadership transition. But even if China’s next ruler proves more liberal than his predecessor, the renminbi’s path to glory will probably look more like a long hurdle race than a 100 metres sprint.
Cedit photo: livetradingnews.com