The problem of turning the yuan into an international currency causes a lot of controversy. Some believe that it is worth Beijing to decide on the complete conversion of the yuan, as it will turn into a full-fledged international currency. Others believe that the yuan has already become an international currency, citing impressive numbers of the growing use of Chinese currency in international trade. Still others adhere to the point of view that it is not beneficial for Beijing to turn the yuan into an international currency and the authorities of the PRC even specifically prevent it. The difficulty of the problem is that the yuan movement in the direction of its internationalization involves three different stages: the transformation of the Chinese currency into a) commercial currency, b) investment currency, c) reserve currency.
Yuan as a trading currency
The process of turning the yuan into an international trading currency began after the financial crisis of 2007-2009, which exposed the precariousness of key world currencies - the dollar and the euro. The main trading partner of China was and remains the United States, the only currency in China’s foreign trade with America is the US dollar. However, the dollar dominates China’s trade not only with the United States, but also with other countries. In 2008-2009 marked the first steps to the internationalization of the yuan. Then a number of enterprises and companies were allowed to use the yuan in trade with Hong Kong (Hong Kong), Macau (Macau), and ASEAN countries. In the middle of 2009, only 365 companies had the right to use yuan in foreign trade transactions, and at the end of 2010, their number increased to 76359. In 2012, all Chinese companies that had licenses for export and import operations could already use yuan. The active transition to foreign trade in RMB occurs simultaneously with the expansion of the use of the national monetary units of China’s trading partners. This is facilitated by the conclusion of bilateral currency swaps of the People’s Bank of China (NBK) with the central banks of the countries that are China’s trading partners. The number of NBK currency swap agreements currently in effect exceeds 20. If in 2010, only 3% of China's foreign trade was in RMB, then at the end of 2013, this figure reached 18%. And according to HSBC, by 2018, this share should grow to 30%.
At the end of 2013 - the beginning of 2014. the yuan traversed the euro in terms of payments serving international trade, and ranked second to the dollar. It is significant that the yuan was used even in China’s trade with the United States, although its share in bilateral Sino-US trade does not exceed 2%.
The position of the yuan in the total international turnover of currencies in the world is much more modest. In addition to servicing trade in goods and services, Chinese currency is used to exchange for other currencies (foreign exchange market) and for various kinds of credit and investment transactions (stock and other financial markets). Ten years ago (2004), the yuan was only on the 35 line among the currencies in terms of total international turnover. At the beginning of 2012, he rose to 13-place. At the beginning of 2014, the Chinese currency has already entered the 7-th place, ahead, for example, the Swiss franc.
About RMB convertibility
The position of the yuan in the total international currency turnover largely depends on its convertibility. At present, this is partial convertibility, which means the possibility of free use by the young for the implementation of current operations, primarily trade deals. Partial conversion was carried out in the 1996 year, and then the Chinese authorities said that it would take another ten years to move to a fully convertible yuan, that is, to cancel restrictions on capital transactions. However, 18 years have passed since then, and such restrictions still remain. Of course, turning the yuan into a freely convertible currency would dramatically increase the use of the yuan in world currency circulation, but this would be only a short-term effect, and besides, risks for the Chinese economy would sharply increase. More recently, the yuan was a currency with a fixed rate, and a lower one, which made it an instrument of active foreign trade expansion by China. Since 2000-ies, Beijing refused to administer the exchange rate, the rate was formally free, but regulated. The People’s Bank of China (NBK) is involved in regulation, which, systematically buying up dollars, euros and other currencies, artificially restrains the growth of the RMB exchange rate, keeping it at a level lower than the purchasing power parity of the yuan and the dollar. If you introduce the full convertibility of the yuan, then there is a risk that the NBK will lose control over the exchange rate of its monetary unit. And this is a direct threat to the current model of the PRC economy based on trade expansion. The Chinese economy, and with the current undervalued yuan, is already facing certain problems, because The world market is saturated with Chinese goods and further export expansion is difficult. The question of the monetary regime of the yuan will be decided depending on what the future model of the PRC economy will be, but the country's leadership does not have full agreement on this issue. And without a clear long-term strategy for economic development, the transition to a freely convertible yuan will result in a concession to Western pressure and serious risks.
For the first time, unofficial statements by Chinese leaders that the yuan is desirable to make a freely convertible currency appeared in the 2011 year, when the country celebrated the 35 anniversary of the death of Mao Zedong. In November 2013, the 3rd plenum of the CPC Central Committee was held, at which two camps were designated: a) a camp of supporters of the development of the domestic market and the transformation of China into a country with a developed and independent economy; b) the camp of supporters of the rapid integration of China into world capital markets. The official communique said that the country would move in the direction of full convertibility of the yuan. This means that the second camp received an advantage, and the supporters of the first camp could only achieve that the transition to a freely convertible yuan would be gradual and not abrupt.
Movement to the investment yuan: the path of small steps
The yuan used in foreign trade is accumulated in the accounts of foreign companies supplying goods to China. Far from all the export earnings of China’s trading partners are used by them for subsequent purchases of goods in China for the same yuan. According to the NBK, at the end of 2013, the weight of RMB abroad exceeded 1,5 trillion, which is equivalent to about 250 billion US dollars. In fact, this money supply forms an offshore RMB market. There appeared two kinds of yuan: a) yuan onshore (those that are stored and circulated within China); b) Yuan offshore (those that are stored and circulated outside of China). Their prices do not match, they have separate course quotes.
Further dynamic development of trade in RMB is possible only under the condition that the yuan accumulated abroad will be used quickly. Of course, you can buy goods for yuan in China, but overseas yuan holders would like to expand their capabilities. Namely: a) if necessary, change the yuan to other currencies; b) to buy not only goods in China, but also assets (that is, to invest in the Chinese economy).
One of the steps towards converting the yuan into a freely convertible currency is China’s signing agreements with other countries on converting the yuan into other currencies. Today, direct conversion of yuan into US dollar, Japanese yen, Australian dollar, Russian ruble, Malaysian ringgit, New Zealand dollar is possible. The last agreement of this kind was concluded between China and New Zealand in March 2014.
A large number of yuan received by China’s trading partners accumulates in the accounts of banks in Hong Kong, which is called the offshore yuan market. At the beginning of this year, deposits in RMB accounted for about 12% of all deposits in the Hong Kong banking system (in 2008, this figure was only 1%). Between this offshore market and the domestic market of China allowed a simplified order of interaction, which makes Hong Kong yuan more convertible. Hong Kong acts as a gateway between the domestic market of China and the global market.
The second offshore market after Hong Kong, where the yuan is traded, is London. In total, at the beginning of this year there were four offshore markets where the yuan was traded using a wide range of other currencies: Hong Kong, London, Singapore, Taiwan. This year is expected to appear another site - in Frankfurt. In the same place, the People’s Bank of China and the Bundesbank agreed to set up a center for payments and clearing settlements in RMB.
Since December 2010, the yuan has also been trading for rubles on the Moscow Stock Exchange. Exchange trading of the ruble-yuan pair was simultaneously launched on the Shanghai Stock Exchange. The trade volume of the yuan-ruble according to the 2013 results of the year increased by 3,5 times as compared to the 2012 year, reaching over 100 billion US dollars.
Yuan trade on different trading platforms contributes to the increase in demand for Chinese currency, but the main question remains: what to invest in the accumulated yuan? And again the question of the full convertibility of the yuan is raised. To do this, on the one hand, it is necessary to liberalize the access of foreign investors to the domestic market of the PRC; on the other hand, remove restrictions on the export of capital from China. Small steps in these two areas are taken every year, and now almost every month.
According to the recommendations of the IMF (in fact, the requirements), in order for a country to declare full convertibility of its currency, it must have developed domestic financial markets. That is, convertibility in a broad sense implies not only the possibility of buying and selling currencies at a market (free) rate, but also the free sale and purchase of bonds and shares (convertibility of securities). In fact, China already has a capital market, and it is the third largest in the world in terms of total capitalization. However, as experts say, the domestic financial market is still not very flexible, it is under strong administrative pressure of the state. In 2014, Beijing announced the liberalization of interest rates on loans, which, according to Western experts, is a significant step towards creating a full-fledged domestic capital market.
From September 2013 of the year, the Shanghai Free Trade Zone began to function, to which foreign investors were admitted. This is a kind of experimental platform where full RMB conversion is allowed. At the start of 2014, the People’s Bank of China issued bonds worth 2,5 billion yuan, with the shares placed in London. Around the same time, the British management company managed to obtain a license from the Chinese Securities Regulatory Commission for direct investment in China. Such a license was obtained for the first time outside Hong Kong or mainland China. In January, 2014, the Chinese Exchange Investment Fund (ETF), began trading on the London Stock Exchange. Especially close relations between Beijing and London are visible to the naked eye. Anglo-Chinese relations received another impulse on 31 in March on 2014, when the Bank of England and the People’s Bank of China signed an agreement to establish a yuan clearing center in London.
According to the IMF criteria for the currency of the emitting country to become a reserve, the country should have: 1) a significant size of the national economy; 2) currency stability; 3) capacious and liquid financial markets.
With the third point, China has problems. Financial analysts believe that only a country that, among other things, ensures the full convertibility of its national currency, can have a truly capacious and liquid financial markets. China, however, cannot simultaneously continue its trade expansion in the world and turn the yuan into a reserve currency. The first requires an undervalued yuan, and the second with such an exchange rate policy is difficult to achieve, as it implies a higher yuan. If you look at the leading reserve currencies, you can see that they all have rates that are higher than the purchasing power parity. And all the countries that issue reserve currencies are rich countries, and they build their prosperity not through the production and export of goods, but through the international movement of capital. Using the privileges derived from the right to issue a reserve currency, the countries of the "golden billion" are burdening goods and services all over the world, paying them with their banknotes. These bank notes are peculiar promissory notes that rich countries do not intend to repay, offering to accumulate them to other countries indefinitely.
The price of China's transition to the yuan as a reserve currency would be the loss of its trading positions. Reserve currencies are currencies of countries with a deficit balance of payments, and any reserve currency is a trap. Back at the beginning of the 1960's. Robert Triffin, an American economist of Belgian origin, derived a formula (the Triffin paradox): the US dollar as a reserve currency and America’s industrial grandeur are incompatible ... Another formulation of the Triffin paradox is: confidence in this reserve currency. Developing the idea of Triffin, some economists came to the conclusion that the national monetary unit cannot function as a reserve currency. Others argue that it can still, but for this currency, military support is needed. And the most significant thing is that at some point the contradictions associated with the use of the national currency as an international currency can lead to a big war in order to nullify the obligations of the issuer.
The dollar became a truly reserve currency only when the United States has formed a steady deficit in foreign trade. America in 60 began to lose the status of an industrial power, and instead of goods began to offer its debt notes in the form of green paper and treasury bonds to the world. And Uncle Sam supported and continues to support the demand for paper products from the Fed and the US Treasury with the help of aircraft carriers and bombers. The reserve yuan is a trap for China: either you have to “unscrew” back to break the trap (but you cannot return the foreign markets), or you can promote the reserve yuan in the world with the help of military force. The second option in the plans of Beijing is not included.
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The temptation to make their currencies global, leading them to replace the US dollar, some countries have already experienced, and it cost them dearly. We are talking about Germany and Japan. At the beginning of the 70's Twentieth century after the cessation of the dollar exchange for gold, America devalued its currency, which caused great dissatisfaction on the part of its European partners. They were especially hurt by the statement addressed to Europeans by the then US Treasury Secretary J. Connally: “The US dollar is our currency and your problem.” The Europeans decided to respond to America by strengthening their currencies and gradually replacing the “green paper” from the European turnover. What happened? If at the beginning of 70's. trade in Europe was served primarily with the help of the dollar, at the beginning of the 90s. - already by more than 50% deutsche mark. Its share in the world foreign exchange reserves in 1989 reached its peak in 20%. There was a feeling that Europe was beginning to free itself from American domination, including from the American banking system. The apogee of European prosperity was the union of currencies of individual states into euros. Someone has already cleared the euro in place of the US dollar as the leading reserve currency. And then, it would seem, unexpectedly, the peak value of the euro in world reserves began to decline, the dollar began to recover somewhat weakened positions. Later in the EU, the debt crisis began, especially in the countries of the PIIGS group. First, the mark, and then the euro quickly ascended the world currency sky as bright stars, but their decline occurred even faster.
Something similar was with the Japanese yen. First, in the 60-70 of the twentieth century, there was a “Japanese miracle”, which led to a sharp increase in the role of the yen in the world monetary system. At the end of the 70-x-beginning of the 80-x. It has already been said that the yen can make a real competition to the US dollar as a reserve currency. At the same time, the impression arose that the Japanese government deliberately slowed down the conversion of the yen into a reserve currency, in every way holding back the course of its monetary unit. Under strong pressure from Washington, including using the threat of economic sanctions, Tokyo agreed in 1984 to sign an agreement with the United States to lift restrictions on capital movements and provide American banks with access to their financial market. A year later, the famous agreement was signed at the New York Plaza Hotel (Plaza Accord), as a result of which the yen appreciated against the dollar by more than 50%. Such a rise of the yen caused a giant financial bubble in Japan, and then a painful liquidation. After that, Japan was never able to recover, staying ever since in permanent economic stagnation. At the peak, the share of the yen in world gold and currency reserves was almost 10%, today it is less than 4%.
Over the past century, there was only one case in which there was a change of currency that fully performed the functions of world money (including reserve currency). We are talking about the British pound sterling and the US Fed. This shift was reinforced by two bloody world wars. It began in August 1914 of the year and ended in July of 1944, the transition period lasted exactly 30 years. It took millions of lives to drive the pound out of the dollar.
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The prospect of replacing the yuan with the dollar as world money is unlikely. In international finance, other scenarios are possible. For example, the yuan can become a regional currency. Say, within ASEAN. The yuan can also become a reserve currency for economically underdeveloped countries, where it is quite difficult to accumulate dollars, euros and other reserve currencies. The turnaround of these countries towards China as the main trading partner is already obvious. So, more than three years ago, Nigeria became the first African country to declare that part of its reserves in foreign currency would be transferred to yuan. Today there are several such countries on the African continent. China also has special relations with many Latin American countries. And if we talk about the official statements of the monetary authorities of other countries about using the yuan as a reserve currency, then the priority here belongs to the National Bank of Belarus (NBB). Back in September 2007, the NBB announced the inclusion of the yuan in the composition of its gold reserves. According to various sources, the central banks of Malaysia, South Korea, Cambodia, the Philippines and Russia have some RMB volumes in their reserves.
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So, de facto, the yuan has to some extent already become for some countries a reserve currency. However, de jure, he is still far from this. The final authority that determines the status of currencies remains the International Monetary Fund. The IMF places only four currencies in the reserve group - the US dollar, the euro, the British pound sterling, and the Japanese yen. They constitute the basket of currencies, which is used to determine the rate of special drawing rights (SDRs) - the supranational non-cash currency unit issued by the Fund. The IMF reviews the composition of the basket of SDR every five years. Back in 2009, China proposed to include the yuan and other currencies of developing countries in the IMF's SDR structure, reducing the influence of the dollar. The current structure of the SDR is as follows: dollar - 41,9%, euro - 37,4%, pound - 11,3%, yen - 9,4%. The next opportunity to reconsider the composition of the basket, and consequently, the re-qualification of currency is presented in 2015 year. There is no doubt that China will again raise the issue of including the yuan in the SDR basket, and the US will again oppose it. The status of the yuan is another rift aggravating the crisis of the International Monetary Fund. In turn, the contradictions that are growing in the IMF are pushing China and other countries on the periphery of the world capitalist economy to create alternative financial structures. In Brazil, in the summer of 2014, at the BRICS summit, it was decided to establish the Fund (Pool of Conditional Currencies) of BRICS. The total amount of foreign exchange reserves of this alternative fund is 100 billion dollars (China's share is 41%). At this stage, the BRICS Fund intends to provide assistance to member countries in currencies that are de jure reserve (primarily the US dollar). However, it is possible that in the future the BRICS Fund will also work with the yuan and other national currencies of the member countries of this group.