Why China has taken a great leap to fi­nan­cial dom­i­nance

Daily Mail - - City & Finance - By Ruth Sun­der­land

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.

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