Why China has taken a great leap to financial dominance
IN THE old hutong markets of Beijing, an aroma of sugary treats fills the air. The parents handing over creased renminbi notes to buy goodies for their child may not have realised it, but yesterday was a historic moment for the Chinese currency they held in their hands.
For this was the day Christine Lagarde, the head of the International Monetary Fund, finally invited China to join the world’s most exclusive currency club.
For the faceless monetary officials closeted in the People’s Bank of China a few miles away, the decision by the elegant Frenchwoman brought with it the sweet smell of success.
The renminbi will now sit at the top table alongside the pound, the dollar, the euro and the yen.
It has the distinction of being the first currency to be embraced by the IMF since the euro in 1999.
More importantly, it is a signal that communist China is being acknowledged by the world’s financial powerbrokers as a serious player on the world stage.
‘ This is a political coup for the Chinese because they can portray it domestically as a reflection of China’s growing importance in the world,’ says Martin Gilbert, chief executive of Aberdeen Asset Management.
It is recognition that has long been craved by President Xi Jinping and his cohorts, but which should give the rest of us pause for thought as China and its currency gain inexorably in power and influence.
Being invited into the Fund’s ‘Special Drawing Rights’ (SDRs) might sound like an arcane issue only interesting to economists. Not so. The basket of currencies was set up in the late 1960s as a way for central banks to store their reserves without having to hoard clunky gold bars.
To the Chinese authorities, it is a hugely significant milestone in a long march to assert their economic dominance.
The turmoil on share and currency markets in the summer is seen as no more than a minor mis-step. So too was the fall on Friday of more than 5pc in share prices when it emerged that top brokerages are under investigation.
Ning Zhu, a professor at the Shanghai Advanced Institute of Finance, says taking a seat at the IMF’s currency top table ‘ won’t change too much’ in immediate practical terms. It is, however, a boost for the forces of reform. COMMUNIST apparatchiks at the People’s Bank of China (PBOC) have for years kept a tight grip on the management of the currency, unlike its Western counterparts which float freely.
‘The PBOC is going to come under immense pressure to be more transparent and improve its way of communicating with international markets. This requires massive cultural and procedural changes,’ says Professor Kamel Mellahi of Warwick Business School.
No doubt Beijing sees the IMF move as nothing more than its due. After all, China accounts for around 13pc of the global econ- omy and more than 15pc of world trade. Already the renminbi – the notes proudly display the visage of Chairman Mao – is nicknamed the redback by forex traders.
It is a not- so- subtle acknowledgment that the communist currency may one day be just as big a deal as the Us greenback.
Indeed, that day may not be too far in the future.
In the summer it leapfrogged the Japanese yen to become the world’s fourth most used currency with a record 2.79pc share of global payments.
According to Mellahi, it could in the long term ‘challenge the dominance of the US dollar as the global reserve currency of choice’.
In the short term, the move is likely to result in as much as $ 150bn of foreign currencies flowing into renminbi, as central banks shift their reserves.
It comes as President Xi is launching the 13th Five Year Plan, which runs from next year to 2020, and an ambitious scheme to revive China’s ancient trade routes, by land and sea.
Known as the ‘one Belt, one Road’ plan, it hopes to raise trade with more than 40 countries to $2.5trillion within a decade. All that trade with China means even more demand for renminbi.
For the City, it may spell longterm profits.
George osborne has vowed to make London the biggest hub outside Asia for renminbi trading. In his recent trip to Beijing, the Chancellor unveiled a deal for the PBOC to issue short-term bonds in London, its first outside its own borders.
The currency boost comes at a point when the Chinese economy is slowing down.
‘Don’t get mired in the shortterm question of where China’s economy is today,’ says Chris Wei, executive chairman of Aviva Asia. ‘In the past two decades they have come through a period of massive growth. The big transition now is from an export economy to a consumer economy.’
THERE is little sign of panic in Beijing, but pessimists fear a debt bubble whose bursting could hit the West hard.
The pride in China at winning a badge of acceptance from an institution like the IMF lays bare the contradiction of a society that wishes to embrace capitalism without democracy.
As Ning Zhu says: ‘ Can that tension be reconciled? That is the hardest question to answer.’
The IMF move is not only a landmark for China. In years to come it is likely to be seen as a pivotal point for the capitalist economies of the West, including our own. China is buying our assets, financing our energy needs and now joining our currency elite.
The West’s free-wheeling, liberal markets will have to come to terms with the rise of a tightly controlled communist state whose economy, even in a slow down, is capable of growing by the size of Switzerland every year. How we do so will shape the next century and beyond.