The peo­ples cur­rency free­ing China’s Yaun

The Pak Banker - - OPINION - Fion Li

CHINA is an eco­nomic gi­ant, but its money is still a bit of a runt. Un­like the U.S. dol­lar, euro and Bri­tish pound, it's lit­tle used away from home. The No. 1 ex­porter has kept its cur­rency off world mar­kets and re­stricted buy­ing and sell­ing. That walled off China from boom-and­bust cap­i­tal flows and kept its goods cheap. Now it has rea­son to loosen the grip on the ren­minbi, which means "the peo­ple's cur­rency," and is bet­ter known by the name for its big­gest unit, called yuan. To fuel a slow­ing econ­omy and back ris­ing political am­bi­tions, China is pro­mot­ing the use of the yuan through­out the world, a slow-mov­ing process known as in­ter­na­tion­al­iza­tion. It's one of the big­gest changes since the cre­ation of the euro, a beck­on­ing bo­nanza for bankers and traders - as well as a threat to China's sta­bil­ity.

The weaker econ­omy is putting down­ward pres­sure on the yuan, prompt­ing China in 2016 to step up in­ter­ven­tion and its cen­tral bank gov­er­nor to de­clare that there was no ba­sis for con­tin­ued de­pre­ci­a­tion. China had sur­prised global mar­kets in Au­gust with its first ma­jorde­val­u­a­tion since 1994, prompt­ing spec­u­la­tion that it would fur­ther weaken the yuan to sup­port ex­porters. That spec­u­la­tion has tested a pledge by China in Au­gust to give mar­ket forces a big­ger role in de­ter­min­ing the ex­change rate. The coun­try has burned through for­eign re­serves and re­versed a trend of loos­en­ing cap­i­tal con­trols in a bid to halt the yuan's slide and stem out­flows. In Novem­ber, the In­ter­na­tional Mon­e­tary Fund said the yuan was traded widely enough to be in­cludeda­mong the re­serve cur­ren­cies in its Spe­cial Draw­ing Rights, a kind of over­draft ac­count it holds for global cen­tral banks. It was a mile­stonethat an­a­lysts es­ti­mated could trig­ger a $1 tril­lion switch into Chi­nese as­sets. There's a long way to go for the cur­rency: China ac­counts for more than 10 per­cent of world trade, yet only about 3 per­cent of global pay­ments are made in yuan. Pri­vate in­vestors - both Chi­nese and non-Chi­nese - can legally move their money in and out of the main­land only through ap­proved pro­grams and in lim­ited amounts.

China has been re­luc­tant to open its doors through­out his­tory; a scorn­ful 1793 let­ter from the em­peror to King Ge­orge III dis­misses all re­quests to ease re­stric­tions on Bri­tish traders. The econ­omy was closed to non-so­cial­ist coun­tries un­der Mao Ze­dong for 30 years and then China started lib­er­al­iz­ing at its own pace, an ap­proach the late leader Deng Xiaoping called "cross­ing the river by feel­ing the stones." In 1994, it set a fixed rate for the yuan against the U.S. dol­lar, a peg that en­dured for a decade.

Af­ter China joined the World Trade Or­ga­ni­za­tion in 2001, se­lected for­eign in­sti­tu­tional in­vestors were per­mit­ted to buy yuan-de­nom­i­nated stocks in lim­ited amounts. The yuan's peg was dropped in 2005 and then un­of­fi­cially slapped back on in 2008 to in­su­late China from the global fi­nan­cial cri­sis. In 2010, China's econ­omy over­took Ja­pan as the world's se­cond-largest and yuan use took off.

The coun­try's lead­ers aim to make the yuan con­vert­ible by 2020. More than a dozen coun­tries are vy­ing to be­come yuan trad­ing hubs and have signed emer­gency swap agree­ments. China is also lead­ing the charge to cre- ate the first new in­ter­na­tional de­vel­op­ment bank in decades. In­side China, the yuan can trade 2 per­cent above or below a daily fix­ing set by the govern­ment; a freely traded off­shore rate tracks it.

The weaker econ­omy is putting down­ward pres­sure on the yuan, prompt­ing China in 2016 to step up in­ter­ven­tion and its cen­tral bank gov­er­nor to de­clare that there was no ba­sis for con­tin­ued de­pre­ci­a­tion. China had sur­prised global mar­kets in Au­gust with its first ma­jorde­val­u­a­tion since 1994, prompt­ing spec­u­la­tion that it would fur­ther weaken the yuan to sup­port ex­porters. That spec­u­la­tion has tested a pledge by China in Au­gust to give mar­ket forces a big­ger role in de­ter­min­ing the ex­change rate. The coun­try has burned through for­eign re­serves and re­versed a trend of loos­en­ing cap­i­tal con­trols in a bid to halt the yuan's slide and stem out­flows. In Novem­ber, the In­ter­na­tional Mon­e­tary Fund said the yuan was traded widely enough to be in­cludeda­mong the re­serve cur­ren­cies in its Spe­cial Draw­ing Rights, a kind of over­draft ac­count it holds for global cen­tral banks. It was a mile­stonethat an­a­lysts es­ti­mated could trig­ger a $1 tril­lion switch into Chi­nese as­sets. There's a long way to go for the cur­rency: China ac­counts for more than 10 per­cent of world trade, yet only about 3 per­cent of global pay­ments are made in yuan. Pri­vate in­vestors - both Chi­nese and non-Chi­nese - can legally move their money in and out of the main­land only through ap­proved pro­grams and in lim­ited amounts.

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