tag:theconversation.com,2011:/fr/topics/renminbi-5158/articlesRenminbi – The Conversation2024-01-12T12:54:38Ztag:theconversation.com,2011:article/2200932024-01-12T12:54:38Z2024-01-12T12:54:38ZWhy the world is turning away from the US dollar<figure><img src="https://images.theconversation.com/files/568291/original/file-20240108-29-m0f5bx.jpg?ixlib=rb-1.1.0&rect=52%2C0%2C5794%2C3859&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">US treasury secretary Janet Yellen.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/us-treasury-secretary-janet-yellen-arrives-2006615249">Alexandros Michailidis/Shutterstock</a></span></figcaption></figure><p>The invasion of Ukraine in February 2022 prompted the US Treasury Department to impose <a href="https://home.treasury.gov/news/press-releases/jy0612">unprecedented sanctions</a> on Russia, to hold it “accountable for its premeditated and unprovoked invasion”.</p>
<p>The aim was to prevent Russia from “prop[ing] up its rapidly depreciating currency by restricting global supplies of the ruble and access to reserves that Russia may try to exchange to support the ruble”. In other words, Russia wouldn’t be able to sell enough US dollars in the foreign exchange market to buy up Russian currency and bolster its value.</p>
<p>Indeed, US secretary of the treasury Janet Yellen called this an “unprecedented action” that would “significantly limit Russia’s ability to use assets to finance its destabilising activities”. </p>
<p>Freezing a sovereign country’s dollar holdings (Russia’s in this case) is a seismic event. It risks accelerating a move away from use of the US dollar for trade or investment by countries that have different geopolitical interests than the US, such as China or the Gulf states.</p>
<p>In fact, several governments outside the west are exploring ways to <a href="https://www.ft.com/content/669260a5-82a5-4e7a-9bbf-4f41c54a6143">reduce their exposure</a> to the dollar. Russia is currently <a href="https://markets.businessinsider.com/news/currencies/dedollarization-dollar-dominance-russia-china-ruble-yuan-war-in-ukraine-2023-9">settling a quarter</a> of its international trade using Chinese renminbi, and its bilateral trade with China is almost entirely settled in the two countries’ respective currencies.</p>
<p>In March 2023, China settled a payment for UAE gas <a href="https://www.nasdaq.com/articles/china-completes-first-yuan-settled-lng-trade">in its own currency</a> rather than US dollars for the first time. Then in November, China and Saudi Arabia signed a <a href="https://www.reuters.com/markets/currencies/china-saudi-arabia-central-banks-sign-local-currency-swap-agreement-2023-11-20/">currency swap agreement</a>, citing a desire to expand the use of their currencies.</p>
<p>There are more troubling signs for the US dollar. Even though central banks’ foreign exchange reserves have been growing steadily year-on-year for more than 20 years, the percentage held in US dollars reached its lowest point in the fourth quarter of 2022, as this chart shows:</p>
<p><strong>US$ held by central banks</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing countries' USD holdings falling." src="https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=466&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=466&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568876/original/file-20240111-29-hksxre.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=466&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Currency composition of central banks’ foreign exchange reserves.</span>
<span class="attribution"><a class="source" href="https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4&sid=1408206195757">Author provided using International Monetary Fund data.</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>This is not a blip. It is the culmination of a long negative trend that has seen the US currency’s share in foreign reserves held by central banks fall from over 70% in the early 2000s to under 60% today.</p>
<p>While the drop is not dramatic, it’s significant and indicative of a negative trend for the dollar that reflects several developments – economic but also geopolitical.</p>
<h2>Leaving the US behind?</h2>
<p>The US economy’s share in the world’s output is falling as emerging economies, especially China, continue to outgrow the US and its western partners. China, the US’s biggest economic competitor, is now the main trading partner to more than 120 countries, with exports amounting to <a href="https://www.statista.com/statistics/264623/leading-export-countries-worldwide/">more than US$3.6 trillion</a> (£2.8 billion). This risks leaving the US behind in the race for global trade dominance.</p>
<p>Over the last 20 years, China’s <a href="https://data.imf.org/?sk=9d6028d4-f14a-464c-a2f2-59b2cd424b85&sid=1514498232936">share of the global economy</a> has more than doubled from 8.9% to 18.5% while the US’s share declined from 20.1% to 15.5% in <a href="https://www.investopedia.com/updates/purchasing-power-parity-ppp/">purchasing power parity</a> terms (which compare prices of specific goods to determine currency purchasing power).</p>
<p>Last year, the Brics economies (fast-growth developing countries Brazil, Russia, India, China and South Africa) overtook those of the G7 (developed economies US, Canada, UK, Germany, France, Italy, Japan and Germany) based on their share of world GDP in purchasing power parity terms.</p>
<p><strong>GDP: G7 v Brics</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing GDP shares of G7 v Bric economies converging before Brics surpasses G7." src="https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/568879/original/file-20240111-21-3uzbr9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Share of GDP, current USD, PPP.</span>
<span class="attribution"><a class="source" href="https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD">Author provided using World Development Indicator data (series: NY.GDP.MKTP.PP.CD), World Bank</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>As <a href="https://www.reuters.com/world/brics-poised-invite-new-members-join-bloc-sources-2023-08-24/">more countries join</a> the Brics, it will give the group <a href="https://www.middleeastmonitor.com/20230815-south-africa-8-arab-countries-request-to-join-brics/">even more economic clout</a>. </p>
<p>Meanwhile, the US economy’s global GDP share is falling and its debt is hitting new heights as it issues more Treasury bills, notes and bonds to fund current government spending. The <a href="https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/#the-growing-national-debt">US national debt</a> stands in excess of US$33 trillion, or 123% of the country’s annual output. Inflationary shocks followed by interest rate increases have made servicing this debt very expensive for US taxpayers, repeatedly raising the risk of a debt default in recent years.</p>
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Read more:
<a href="https://theconversation.com/debt-ceiling-negotiators-reach-a-deal-5-essential-reads-about-the-tentative-accord-brinkmanship-and-the-danger-of-default-206174">Debt ceiling negotiators reach a deal: 5 essential reads about the tentative accord, brinkmanship and the danger of default</a>
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<p>There is no doubt the US dollar still dominates world markets right now, accounting for most of the transactions in <a href="https://www.sciencedirect.com/science/article/pii/S0022199622000368?via%3Dihub">international trade</a>. Its share in the foreign exchange market is colossal at <a href="https://data.bis.org/topics/DER/tables-and-dashboards/BIS,DER_D11_3,1.0">88% of transactions</a>, and it remains the most widely held “international reserve” by central banks who want to ensure they can cover their countries’ imports and support the value of their own currencies.</p>
<p>But the centrality of the US currency since the second world war has not always been welcome –– certainly not by US foes and sometimes not even by its friends. Valéry Giscard d'Estaing, the 20th president of France and a finance minister in the 1960s, called the dollar’s reserve status an <a href="https://www.nber.org/system/files/chapters/c0121/c0121.pdf">“exorbitant privilege”</a> for the US. He probably meant that demand for US assets from abroad was so high that it could borrow easily at favourable terms to finance its current account deficit –– a privilege not available to other nations.</p>
<p>Current <a href="https://theconversation.com/global-triggers-why-these-five-big-issues-could-cause-significant-problems-in-2024-219371">global geopolitical and economic shifts</a> could now see this exorbitant privilege challenged. The refusal of Russia’s Brics partners and many UN nations to undertake western-style sanctions against Russia is evidence of the limitations the west faces in exerting geopolitical influence.</p>
<p>And from an economic perspective, China as the world’s top trader and Russia as one of the world’s richest countries <a href="https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter">by energy reserves</a> have amassed <a href="https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q3-2023/central-banks">large gold holdings</a> which could replace some US dollar uses. Both are looking to work with other countries, <a href="https://www.iiss.org/sv/publications/strategic-comments/2023/the-state-of-de-dollarisation-in-the-gulf-region/">including those in the Gulf region</a>, to reduce reliance on the US dollar. </p>
<h2>Challenger currencies</h2>
<p>Convincing non-western investors to use a “challenger currency” – whether the Chinese renminbi or a Brics currency – could become easier following the US Treasury’s freezing of Russian assets. And these switches <a href="https://www.ccn.com/news/seizing-300b-russian-assets-cataclysm-dollar-nobel-prize/">could accelerate</a> if the US decides to seize the frozen Russian assets.</p>
<p>It’s increasingly clear that, as non-western countries assert themselves in the world’s economic arena, geopolitical divisions with the west will cause additional friction. As a result, the US dollar’s role is almost certain to become more limited than it has been at any time since the end of the second world war.</p><img src="https://counter.theconversation.com/content/220093/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexandros Mandilaras does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Geopolitical shifts that are dividing the world could create problems for the US dollar, traditionally the dominant currency globally for trade and investment.Alexandros Mandilaras, Associate professor, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1218342019-08-15T12:42:07Z2019-08-15T12:42:07ZThe US branding China a ‘currency manipulator’ threatens global stability<p>The US has escalated its <a href="https://theconversation.com/winners-and-losers-in-the-us-china-trade-war-119320">trade war with China</a> by accusing the country of devaluing its currency to make its exports unfairly cheap. When China’s currency, the renminbi (RMB) fell below the symbolic seven-per-dollar level on August 5, President Donald Trump reacted by <a href="https://twitter.com/realdonaldtrump/status/1158350120649408513">labelling China a currency manipulator</a> on Twitter. His Treasury department <a href="https://www.bbc.co.uk/news/business-49244702">followed suit</a>, making it the official government position. </p>
<p>It is the latest development in a fight that was never purely about economics. And it marks a fundamental shift in relations between the world’s two largest economies. What was a relatively symbiotic economic relationship between the US and China is beginning to fracture – with serious implications for both countries, and the rest of the world.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1158350120649408513"}"></div></p>
<p>The charge of currency manipulation has been thrown around by Trump since the early days of his <a href="https://eu.usatoday.com/story/money/2017/04/16/trump-defends-u-turn-china-currencys-practices/100548546/">2015-16 presidential campaign</a>. It is not, however, a classification that should be used lightly. <a href="https://www.scmp.com/economy/global-economy/article/3022526/singapore-economy-tipped-recession-us-china-trade-war-slams">Economic growth forecasts have worsened</a> as a result and this kind of rhetoric makes matters worse.</p>
<h2>What is currency manipulation?</h2>
<p>Currency manipulation involves the artificial movement of a domestic currency valuation through government intervention such as by printing more money or buying and selling other currencies on the foreign exchange market. </p>
<p>Currency valuation is particularly important in the early stages of a country’s economic development. China is no exception. For instance, from the mid-1980s to late 1990s China <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">kept its currency low</a> to make its labour and production costs cheap. Managing its currency in this way proved a significant advantage for attracting foreign investment and enabled China to accumulate foreign exchange reserves. All of which are necessary for sustained growth. </p>
<p>But devaluing the currency also translates into more expensive imports for China’s domestic consumers, and a higher risk of <a href="https://www.ft.com/content/ce27b2de-be24-11e9-b350-db00d509634e?segmentId=778a3b31-0eac-c57a-a529-d296f5da8125">foreign investors pulling their money out of the country</a>. Plus, with China’s recent efforts to transform the RMB <a href="https://theconversation.com/chinas-currency-gets-the-imf-stamp-of-approval-as-it-enters-a-new-normal-42559">into an international reserve currency</a> that is held by central banks around the world, foreign holders of the RMB expect a stable value. So manipulation can have real – and potentially destabilising – costs for China and its economy.</p>
<p>A year and a half into the US-China trade war, things are starting to take their toll for China. On July 15, the country reported a 6.2% growth rate, its <a href="https://www.ft.com/content/73f06b8a-a696-11e9-984c-fac8325aaa04">slowest in 27 years</a>. With <a href="https://www.scmp.com/economy/china-economy/article/3012481/chinas-debt-ratio-hits-record-high-efforts-offset-us-trade">record levels of debt</a> and <a href="https://www.ibtimes.com/chinas-food-prices-7-consumer-inflation-hits-15-month-high-2799938">consumer inflation rates reaching a 15-month high</a>, currency devaluation would in many ways exacerbate the situation. While China is known for state intervention, there’s no foul play here.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288156/original/file-20190815-136203-1hy6eq7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The RMB recently passed the symbolic seven dollar mark.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/currency-peoples-republic-china-united-states-1471633103?src=hZJoSarsZslGqGSocEpz0w-1-42">Junming Lu /shutterstock.com</a></span>
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<p>To understand China’s currency regime, it is important to recognise that China prioritises stability. Its economic policy, and its approach to currency flows in particular, has been <a href="https://www.cis.org.au/app/uploads/2015/04/images/stories/policy-magazine/1999-autumn/1999-15-1-terry-black-susan-black.pdf">preoccupied with minimising volatility</a>. </p>
<p>The drop in value of the RMB followed an announcement by the Trump administration that it was raising tariffs on <a href="https://www.cnbc.com/2019/08/01/trump-says-us-will-impose-10percent-tariffs-on-300-billion-of-chinese-goods-starting-september-1.html">US$300 billion of Chinese goods</a>. This went against the consensus the two sides <a href="https://theconversation.com/g20-summit-bring-a-truce-in-us-china-trade-relations-but-its-likely-to-be-temporary-108017">reached at the G20 in June</a> and Chinese government <a href="https://www.ft.com/content/39c5e812-bda3-11e9-89e2-41e555e96722">officials say</a> that the RMB devaluation came from the market reacting to this announcement, with escalating trade tensions putting the currency under pressure.</p>
<p>Similarly, in its annual assessment of China’s economy, published in the wake of US accusations, the <a href="https://www.imf.org/en/Publications/CR/Issues/2019/08/08/Peoples-Republic-of-China-2019-Article-IV-Consultation-Press-Release-Staff-Report-Staff-48576">IMF stuck with its position</a> that the RMB is in line with China’s economic fundamentals. If anything, according to the IMF, the US dollar <a href="https://markets.businessinsider.com/news/stocks/imf-agrees-with-trump-us-dollar-overvalued-german-euro-undervalued-2019-7-1028364276">is overvalued</a>. </p>
<h2>Interdependence</h2>
<p>America’s decision to label China a currency manipulator has significant implications for world markets. It not only exacerbates the uncertainty surrounding the state of relations between China and its largest trading partner, but as an escalation of tensions it is bad for both China’s and global economic growth. </p>
<p>Markets have been on edge since the US and China began putting tariffs on each other’s goods in July 2018. Immediately following the Treasury’s designation of China as a currency manipulator, volatility in the markets was seen <a href="https://www.theguardian.com/business/2019/aug/05/markets-fall-sharply-amid-fears-of-full-scale-us-china-yuan-currency-war">around the world</a>. </p>
<p>China is at the heart of the world’s global supply chain. Any economic slow down will extend to its major production and resource partners. Big American and multinational businesses have been hit by the uncertainty surrounding the costs of production, parts and components that come with an escalating trade war. Accusations of currency manipulation raise these tensions, further denting consumer confidence and their purchasing power around the world. </p>
<p>Plus, Trump’s approach to managing negotiations with China ignores the highly interdependent relationship of the two countries. One of the ways that China keeps the RMB from appreciating in value is by buying US debt <a href="https://www.economist.com/finance-and-economics/2018/06/23/sino-american-interdependence-has-been-a-force-for-geopolitical-stability">with its large amount of US dollar reserves</a>. This, in turn, enables China to keep producing and exporting cheap goods, which are bought by US consumers. Dubbed <a href="https://www.telegraph.co.uk/comment/personal-view/3638174/Not-two-countries-but-one-Chimerica.html">“Chimerica”</a>, this situation has been a win-win for the two countries.</p>
<p>The Trump administration’s approach to China prioritises short-termism and immediate gain by appealing to the populist sentiment of his voter base over economic reality. By breaking the recent G20 accord and challenging the decisions of international institutions like the IMF, the US is ramping up the US-China trade war. And this cuts to the heart of how America’s global leadership is increasingly unreliable.</p>
<p>The rest of the world has long looked to the US and the institutions it spearheads (such as the IMF and World Bank) as a guide for global economic governance. So the accusation of currency manipulation not only raises genuine concerns for markets, but could help foster a global split along economic lines. If China gets cut off from US consumers it will be forced to turn elsewhere and, as the <a href="https://www.cnbc.com/2018/04/05/chinas-1-point-2-trillion-weapon-that-could-be-used-in-a-us-trade-war.html">single largest holder of US debt</a>, it has a serious weapon up its sleeve.</p><img src="https://counter.theconversation.com/content/121834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Winnie King does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US and China have an interdependent economic relationship. If this unravels it will have global ramifications.Winnie King, Lecturer East Asian and International Political Economy, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/763102017-05-01T07:20:37Z2017-05-01T07:20:37ZWhy Chinese investors find Australian real estate so alluring<p>Chinese investors <a href="http://www.smh.com.au/business/the-economy/foreigners-pile-back-into-australian-property-reigniting-bubble-fears-20161124-gsx97i.html">are often blamed for Australia’s escalating</a> house prices but a number of factors might mean the demand will drop off in coming years.</p>
<p>A <a href="http://demystifyingchina.com.au/reports/demystifying-chinese-investment-in-australia-april-2016.pdf">recently released report</a> found investment in residential real estate by the Chinese is slowing. As the gap in rental yields between the two countries closes and house prices increase, Australian residential real estate is beginning to look less attractive. The lifting of restrictions on Chinese urban residential property ownership and personal investment monetary restrictions may also play a part. </p>
<p>China <a href="http://www.hurun.net/en/">has A$1.34 million high net worth individuals</a> and 568 billionaires. Their combined net worth is equivalent to Australia’s GDP. </p>
<p>Many Chinese investors have access to both legitimate and hidden income and wealth and seek to invest both in overseas real estate. This is at a time when China is in the grip of <a href="http://www.theage.com.au/federal-politics/political-opinion/taiwanese-solution-to-soaring-house-prices-dont-have-kids-20100426-tn7m?deviceType=text">its own housing affordability crisis</a>.</p>
<h2>Why Australia has seemed attractive</h2>
<p>In 2015, Chinese investors ploughed approximately <a href="http://demystifyingchina.com.au/reports/demystifying-chinese-investment-in-australia-april-2016.pdf">A$6.8 billion into Australian commercial and residential real estate</a>. <a href="https://firb.gov.au/real-estate/">Current Foreign Investment Review Board (FIRB)</a> policies channel incoming real estate investment funding into new dwellings, creating additional jobs in <a href="https://firb.gov.au/real-estate/">construction and supporting economic growth</a>. </p>
<p>Though temporary Australian residents may be required to sell older residential property when they leave Australia, many foreign nationals are able to retain, rent out, sell or live in newly constructed dwellings. This is a major draw card for Chinese investment in new residential buildings. </p>
<p>Other pull factors include Australia’s <a href="http://demystifyingchina.com.au/reports/demystifying-chinese-investment-in-australia-april-2016.pdf">stable financial institutions, compared to China,</a>, well regulated land title system, buoyant real estate market, high capital gains rates in major cities and lower deposit requirements. </p>
<p>Australia’s <a href="https://firb.gov.au/real-estate/">Foreign Investment Review Board (FIRB)</a> may keep an eye on these factors when considering new foreign investment in the housing market, but it struggles to counteract the push effect of Chinese property law restrictions and investor needs.</p>
<h2>Factors in China at play</h2>
<p>Conditions in China’s economy and regulatory environment also push Chinese investors to focus on overseas markets. The depreciation of the <a href="http://demystifyingchina.com.au/reports/demystifying-chinese-investment-in-australia-april-2016.pdf">Chinese currency is a significant force</a>. As this currency is devalued, Chinese investors reconsider what and where they can afford to purchase. </p>
<p>Australia’s <a href="http://www.afr.com/real-estate/record-low-rental-yields-in-sydney-and-melbourne-a-risky-sign-moodys-warns-20160411-go3iq0">rental yields of 2-3% in major cities</a> are twice that of China’s. <a href="https://www.researchgate.net/project/Multi-owned-properties-in-the-Asia-Pacific-Region-Rights-Responsibilities-and-Restrictions">Legislative changes to residential property investment</a> in China also makes Australia look appealing. </p>
<p>China has a dual property ownership system that segregates rural and urban land ownership systems. Rural cooperatives own the rural land ownership rights. Cooperative members can only sell to other members of the same rural cooperative. </p>
<p>This limits competition for rural land and keeps rural land prices low. But it also means rural land is an unattractive investment choice for Chinese. </p>
<p>Urban land, on the other hand, remains state owned with a 70 year lease system to housing owners. The system limits ownership of urban residential buildings to people with urban registration or those that have lived in and paid taxes in the same urban area for five consecutive years. This situation stops many Chinese from being able to purchase urban residential property.</p>
<p>Between 2011 and 2015, those who did have the appropriate registration were limited to a maximum purchase of two residential properties within their urban area – one property to live in and one as an investment. This limitation still applies in Beijing. </p>
<p>The limitation was put in place to counteract major housing affordability discontent as an increasing number of people were locked out of the housing market. This problem is exacerbated by the <a href="https://www.princeton.edu/%7Ewxiong/papers/HousingBoom.pdf">30% deposit requirement</a> on residential real estate purchases. This combination of factors forces many Chinese investors into purchasing properties on China’s black market where ownership is uncertain or seek investment opportunities outside China. </p>
<p>The <a href="http://www.safe.gov.cn/">Chinese State Administration of Foreign Exchange</a> introduced new regulations to tighten the flow of capital from China in November 2016. This agency is tasked with the approval of outgoing overseas payments of more than US$5 million. However, most housing acquisitions in Australia fall below this limit.</p>
<p>From 2017, a new rule was introduced to limit the yearly foreign currency holding <a href="http://ny.uschinapress.com/m/spotlight/2017/01-03/110834.html">to US$50,000 for individual investors.</a>. </p>
<p>Larger Chinese development companies operating in Australia are <a href="http://www.theaustralian.com.au/business/opinion/robert-gottliebsen/apartment-outlook-brightens-as-chinese-buyers-come-rushing-back/news-story/1fcea1add2024aff1ed059c45c2883af">known to sell individual residential units “off the plan”</a> directly to Chinese property investors. Where this is the case, the developer has a vested interest in finding ways to circumvent the new limits on foreign currency holding in order to settle a contract. However, it will take time for developers to adjust their methods.</p>
<p>As house prices increase, rental yields generally fall. This is due to the large amount borrowed by investors <a href="https://www.mortgagechoice.com.au/home-loans/home-buying-advice/tips-and-tools/what-is-rental-yield.aspx">compared to what they receive in rental income</a>. </p>
<p>Though rent prices have increased significantly in Melbourne and Sydney, they have not kept pace with house prices. Rental yields have fallen in major cities. </p>
<p>In China, where the rental yield is 1-1.5%, some investors reconsider whether it is worth <a href="https://www.researchgate.net/project/Multi-owned-properties-in-the-Asia-Pacific-Region-Rights-Responsibilities-and-Restrictions">the effort of renting out their properties</a>. Instead, they rely on the capital gain to create a profit while leaving the property vacant, preventing wear and tear to it. This practice has serious implications for the supply of rental properties in China. </p>
<p>As Australia continues to struggle with escalating house prices and decreasing rental yields, residential real estate investment becomes less attractive as a long term investment for Chinese investors. The reliance on capital gains may result in higher numbers of vacant properties in Australia, counteracting the FIRB’s intentions.</p>
<p>The restrictions enacted by Chinese regulators may slow the flow of money out of China in the short term. However, Chinese investors are likely to find ways to circumvent these restrictions. The lifting of restrictions on Chinese residential property ownership may refocus investment choice location to within China.</p><img src="https://counter.theconversation.com/content/76310/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Chinese real estate investors might be more interested in investing in their homeland rather than Australia, given the changing market and regulations.Erika Altmann, Qualitative Researcher, University of TasmaniaZhixuan Yang, Lecturer in Real Property Development and ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/698952016-12-08T19:05:57Z2016-12-08T19:05:57ZWhy capital is fleeing China and what it means for Australia<figure><img src="https://images.theconversation.com/files/149154/original/image-20161208-18042-6u3ru5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">China's foreign reserves are declining. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Foreign reserves at the People’s Bank of China (PBoC), China’s central bank, <a href="http://www.reuters.com/article/china-economy-forex-reserves-idUSENNGC20SI">fell for the fifth consecutive month in November</a>, dropping by US$69.1 billion to US$3.1 trillion. This is a level not seen since 2011, with reserves shrinking more than US$500 billion this year alone.</p>
<p>The Chinese government has moved to clamp down on capital flight, by introducing <a href="http://www.reuters.com/article/us-china-fund-idUSKBN13W18O">restrictions on foreign investment</a> and <a href="http://in.reuters.com/article/asia-gold-demand-idINKBN13R0UG">curbing gold imports</a>. But it could go further as the yuan stares down its worst year since 2005, making it harder for Chinese companies to borrow and repay debt. </p>
<p>The decline in China’s foreign reserves is not a blip, but has roots that go deep and could affect the ability of Chinese consumers and companies to be our customers. So the introduction of currency controls, especially if China <a href="https://www.bloomberg.com/news/articles/2016-11-30/china-said-to-add-curbs-on-yuan-outflows-outbound-investments">revisits the quotas for Chinese individuals</a> to spend on foreign goods or travel, is something to watch. </p>
<h2>Why China is bleeding foreign exchange</h2>
<p>The story goes back to August 2015, when China <a href="https://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation">devalued the yuan</a> in an apparent attempt to boost exports and growth. The devaluation probably would not have drawn so much attention if not for the fact that it appeared to trigger a <a href="http://www.reuters.com/article/us-china-markets-idUSKCN0R610Y20150907">huge</a> outflow of capital from China. </p>
<p>It all has to do with <a href="http://www.sciencedirect.com/science/article/pii/S1043951X07000478">historical patterns of borrowing</a> by Chinese companies (and some wealthy individuals). During the boom years of export-and-investment-led economic growth, investing in China offered a good return (especially compared to what was available in Western economies). China’s <a href="https://theconversation.com/shadow-banking-increases-the-risk-of-another-global-financial-crisis-65328">shadow banking system</a> grew and flourished – offering even greater returns to Chinese firms and individuals. </p>
<p>At the time it made sense to borrow at near-zero rates in the US and Europe, convert the money to yuan and invest in China. But the Chinese government brought this trade undone when it devalued the yuan back in August 2015. Borrowing in US dollars then selling those dollars to buy yuan-denominated assets no longer works. </p>
<p>It is now happening in reverse – yuan-denominated assets are <a href="http://www.wsj.com/articles/with-yuan-down-dim-sum-debt-loses-favor-1440617762">being sold at record rates</a> to buy US dollars in order to pay back old loans before it becomes too late. This outward flow of yuan generates downward pressure on the Chinese currency, which <a href="http://www.reuters.com/article/china-economy-forex-reserves-idUSENNGC20SI">recently fell</a> to its lowest levels in years. This is creating a feedback loop. </p>
<p>Before 2015, the PBoC bought dollars from Chinese companies that earned export income, <a href="http://qz.com/226704/problems-even-chinas-4-trillion-cant-solve/">printing lots of new yuan</a> to do so. This money then circulated within the Chinese banking system and supplied the credit for China’s huge expansion. </p>
<p>But now the <a href="https://www.bloomberg.com/news/articles/2016-06-15/china-dumping-more-than-treasuries-as-u-s-stocks-join-fire-sale">PBoC is selling down</a> its reserves of US dollars to prop up the yuan. This also places pressure on Chinese banks, and may force the PBoC to allow banks to free up more of their available capital. These deteriorating conditions in the banking sector, along with China’s fast-rising private-sector debt, increase the cost of capital and put further pressure on foreign exchange reserves. </p>
<h2>The economy isn’t helping</h2>
<p>Further adding to the pressure since 2015 has been <a href="http://thediplomat.com/2014/12/china-urges-companies-to-go-global/">Chinese government encouragement</a> for local companies to “go global”. Often such investments have been <a href="https://www.lowyinstitute.org/issues/chinese-foreign-aid">supported by subsidised loans or grants from China’s Export-Import Bank</a> (China Exim Bank). At the same time, <a href="http://www.wsj.com/articles/china-industrial-output-growth-holds-steady-but-investment-weakens-1465791643">foreign investment into China has dwindled</a> as labour and other costs have risen. </p>
<p>Both of these phenomena have been part of the Chinese government’s overall strategy of internationalisation, while moving away from an economy dependent on exports and towards an economy based much more on services and domestic consumption. The problem is, however, that the hoped-for rise in domestic consumption <a href="http://thediplomat.com/2015/05/chinas-efforts-to-boost-consumption-are-they-enough/">has not eventuated</a> at anything like the rate necessary. </p>
<p>A <a href="http://www.bain.com/about/press/press-releases/the_global_personal_luxury_goods_market_holds_steady_at_249_billion_amid_geopolitical_uncertainty.aspx">crackdown on luxury consumption</a> – seen as a sign of corruption by senior Communist Party members and officials – has further detracted from the desired growth in domestic consumption. </p>
<h2>What all this means for us</h2>
<p>Even with the restrictions put in place, there isn’t a total yuan lockdown. It is hard to prevent the movement of yuan out of China <a href="http://www.rba.gov.au/publications/bulletin/2013/jun/pdf/bu-0613-8.pdf">through the offshore yuan market</a>. The Chinese banking authorities have fewer ways of preventing such transfers, especially as <a href="http://uk.reuters.com/article/uk-china-yuan-offshore-idUKKBN0MM0EL20150326">the government pushes</a> the yuan as an alternative to traditional US dollar settlements. </p>
<p>But it’s likely China and its people will be much less able to afford direct purchases of Australian goods (iron ore, coal) and services (education, tourism) in the near future. This does not mean that Chinese demand for Australian goods will fall, but things might have to change. </p>
<p>It means that instead of just “selling stuff” to China, Australia needs to engage with the Chinese economy – to understand what that economy really needs. Australia has know-how and technology in health care, education, agriculture and energy that China needs and wants.</p>
<p>With the limitations of Chinese currency and investment controls, Australia may need to be more generous in its willingness to transfer some of that technology and know-how. For its part, China has to be much better at ensuring that the intellectual property involved in such transfers and the returns from them are properly protected. This could be the start of something brand new.</p><img src="https://counter.theconversation.com/content/69895/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alice de Jonge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China has introduced new currency and investment controls after foreign exchange reserves hit the lowest level since 2011. This could have a profound impact on our trading relationship.Alice de Jonge, Senior Lecturer, International Law; Asian Business Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/551222016-02-22T19:06:46Z2016-02-22T19:06:46ZThree ways China can tackle its currency dilemma<p>You might have noticed that the People’s Bank of China (PBC), China’s central bank, is in a difficult position.</p>
<p>Stability and growth are what the PBC wants. But at least two forces are working against them - the prospect of rising US interest rates and a slowing Chinese economy in transition. These forces have been drawing capital out of China and towards the US since late 2014. </p>
<p>Constant downward pressure on the Renminbi (RMB) has fuelled expectations of continued devaluation, leading to further capital outflows and instability.</p>
<p>The PBC’s efforts to prevent a devaluation spiral by intervening in the foreign exchange markets have made the future value of the RMB much harder to predict. This has presented a challenge for speculators trying to judge when to short the currency. <a href="http://www.scmp.com/print/news/china/economy/article/1906325/how-beijing-and-hong-kong-sent-billionaire-george-soros-packing?utm_source=edm&utm_medium=edm&utm_content=20160128&utm_campaign=scmp_today">A battle of nerves has ensued</a>.</p>
<p>China’s economic slowdown was always bound to happen. Export-led growth throughout the 1990s was based on highly polluting, intensive manufacturing industries that were never sustainable in the long term. Following the global financial crisis of 2008, the Chinese government embarked on a construction-led stimulus campaign that was also never going to be sustainable.</p>
<p>So the Chinese government is right to have embarked on a program aimed at shifting the economy from quantity to quality - moving growth into the services sectors and away from manufacturing, and into domestic consumption, rather than export production.</p>
<p>But turning round such a huge economy takes time, and in the meantime the PBC is stuck with the problem of keeping the currency, and the economy, on an even keel in the rough seas of a turbulent global economy.</p>
<p>There are two main strategies for keeping the RMB stable, neither of which is sustainable in the longer term. First, the PBC has been spending its foreign reserves as and when necessary to maintain the value of the RMB – an expensive policy that cost China <a href="http://www.eastasiaforum.org/2016/02/07/china-still-has-room-to-move-on-rmb/">more than US$500 billion in 2015</a> alone. </p>
<p>Second, the RMB is protected from rapid devaluation through what is known as a crawling peg – since 11 August, 2015, the PBC has ensured that the RMB exchange rate at the start of daily trading is tied to the previous day’s close, and there is a central parity rate around which the <a href="http://theconversation.com/fans-of-a-more-open-china-should-welcome-the-devalued-yuan-46020">RMB is allowed to range</a>.</p>
<p>There are three options for solving this dilemma: stop all intervention and let the RMB float, peg it to a basket of currencies, or peg it to the US dollar tightly, as China did during the Asian financial crisis. So far, there is no clear indication of what the PBC’s strategy is or will be.</p>
<p>Floating or mostly floating the RMB, thereby letting the market decide its value, is what the <a href="http://www.economist.com/news/business-and-finance/21679341-its-new-status-might-make-weaker-yuan-chinese-renminbi-joins-imfs">Chinese government (and almost everyone else) expects</a> in the long run. </p>
<p>This is because Beijing wants the RMB to become an international currency – an ambition that was given a boost in November last year, when the IMF agreed to include the RMB in its basket of currencies used as the basis for the Special Drawing Right (SDR) unit of account. </p>
<p>The significance of this decision was to signal that the IMF now considers the RMB, along with the US dollar, the British Pound, the Euro and the Japanese Yen, a safe, liquid asset in which governments can park their wealth.</p>
<p>But far from setting off a groundswell of demand for the RMB as one might expect, the IMF’s decision ironically appears to have paved the way for its further depreciation. This is because the PBC now finds itself under more pressure to manage the RMB as most developed economy central banks do – by letting market forces determine their value. </p>
<p>The fear is, however, that as soon as the PBC stops selling dollars to support the RMB, what economist Kenneth Rogoff calls <a href="https://www.project-syndicate.org/commentary/china-devaluation-capital-flight-by-kenneth-rogoff-2016-02" title=""https://www.project-syndicate.org/commentary/china-devaluation-capital-flight-by-kenneth-rogoff-2016-02 "">“the Great Escape from China”</a> may result – at least in the absence of tight capital controls. But tight capital controls are exactly what the Chinese authorities have been working hard to get rid of.</p>
<p>Over the past few years there has been a gradual relaxation of restrictions on Chinese investments abroad under what is known as the “Going Out” policy – aimed at promoting Chinese investments abroad and forming another key part of making the RMB an international currency. </p>
<p>Private citizens are now allowed to take up to $50,000 per year out of the country, while companies have been using all sorts of devices to get money out – <a href="https://www.project-syndicate.org/commentary/china-devaluation-capital-flight-by-kenneth-rogoff-2016-02">both legal and not so legal</a>. The big risk for the PBC is that floating the RMB would lead to a double digit fall in the exchange rate, which could scare global markets into a crisis. </p>
<p>While such a crisis is unlikely, given China’s still large current account and capital account surpluses, its relatively small corporate foreign debt and its low inflation rate, the Chinese authorities still hate the feeling of not being in full control. Hence the reluctance to let go.</p>
<p>As a safe, transitionary step, the PBC could peg the yuan to a basket of currencies, with an adjustable central parity and a wide band – either set or unannounced. An unannounced band aims to divide investors so that before the yuan falls to the unannounced floor, at least some traders will think it has <a href="http://www.eastasiaforum.org/2016/02/07/china-still-has-room-to-move-on-rmb/">fallen far enough and begin buying again</a>. But this sort of basket peg is open to the charge of chronic transparency problems. And a basket peg still shares many of the problems of a simple dollar peg.</p>
<p>One way in which the Chinese authorities have sought to take back control is by clamping down more heavily on illegal capital flows – but recovering escaped assets and closing off currency taps is not proving easy.</p>
<p>This year, the Chinese will host a G20 summit in September, in the southern Chinese city of Hangzhou. At that summit, it will be crucial for all parties to recognise that China’s economic health and global growth are inextricably linked. To date, the international community has joined Chinese financial officials in urging China’s political leadership to pursue financial liberalisation. This is surely correct for the long run. </p>
<p>But it may well be in China’s and the global interest that the liberalisation process proceed more gradually than is currently envisioned, so that capital outflows from China do not threaten China’s own financial stability and <a href="https://www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation">spread weakness to the global economy at large</a>.</p>
<p>One more priority in Hangzhou should be promoting global infrastructure investment. In this regard, the Chinese-led Asian Infrastructure Investment Bank is a valuable step forward, and it should be supported by the international community, even as it is encouraged to respect international norms and standards relating to issues such as environmental protection and integrity in procurement.</p><img src="https://counter.theconversation.com/content/55122/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alice de Jonge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Beijing wants the Renminbi to become an international currency - but is it prepared to do what it takes?Alice de Jonge, Senior Lecturer, International Law; Asian Business Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/529032016-01-10T19:14:50Z2016-01-10T19:14:50ZChina’s currency plan still on track, despite global market volatility<p>The recent equity market volatility in China is unlikely to derail plans for the internationalisation of the Renminbi (RMB).</p>
<p>Why? Because China is too far down the track, most of the changes needed are for domestic reasons and the market “hiccups” are merely a sign of a new stock market finding its feet. </p>
<p>Granted, the new market is currently the second biggest equity market in the world and is set to be the biggest by 2025 therefore the impact of any hiccups are far reaching.</p>
<p>The first week of trading in 2016 on the Shanghai and Shenzhen equity markets saw the introduction of a <a href="https://theconversation.com/just-another-bad-day-in-the-office-for-chinas-lonely-stock-traders-52756">new circuit breaker system</a> designed to restrict excessive fluctuations. The system tracks the movements of the CSI300 Index and imposes a 15 minute suspension if the market moves by 5% and a one day suspension for a 7% move. </p>
<p>The system is not dissimilar, albeit more conservative, to the US system where a 10% movement on the DOW results in a one hour suspension on the NYSE (with further measures at higher levels of volatility). It seems that the tight threshold of the circuit breaker coupled with a revised ban on selling by major shareholders spooked the largely retail investor base in an environment of increased economic uncertainty and potential deflation. This led to an increase rather than a reduction of equity market volatility. </p>
<p>Within days of the introduction the circuit breakers have been tripped twice with trading on January 6 only lasting 29 minutes from the open. After only four days the circuit breaker was suspended.</p>
<p>One of the central issues here is the internationalisation of the RMB. Internationalisation of a currency occurs when it is widely used offshore for trade, investment and reserve currency purposes. </p>
<p>It requires few, if any, capital controls, a floating exchange rate, deregulated interest rates and sound regulatory and corporate governance frameworks. China is making deliberate steps to internationalise its currency and this objective has been openly and officially pursued. </p>
<p>This will see China’s financial relations with the rest of the world matching its trade relations and the size of its economy.</p>
<p>Unfortunately, the equity market turbulence coincided with renewed fears that China would devalue the RMB. News surrounding the exchange rate, reserve levels and oil prices caused havoc in international markets and resulted in many markets experiencing the worst start to the year on record. </p>
<p>However impact of this turbulence has been somewhat exaggerated as it has been reported by some as “clumsy” and “ineffective” policy decision making by China and suggests that China is not ready to internationalise its currency. This is far from accurate. China needs to fit decades of capital market learning into a handful of years and there is no doubt that the road from a planned economy will be a little bumpy. </p>
<p>I have co-authored two reports on this topic and in the <a href="http://www.cifr.edu.au/project/RMB.aspx">2014 report</a> we estimated a 10 year horizon but revised that to a five year clock <a href="https://www.rsfas.anu.edu.au/rsfas/archived-news/h22/">in the 2015 report</a>. This change reflects the increased pace of change and commitment by China. However this is the timeframe for access – more time may be needed for confidence, especially with regard to corporate governance and investor protection.</p>
<p>There are four things we need to consider in terms of confidence:</p>
<ul>
<li><p>Shanghai and Shenzhen markets are dominated by retail investors. According to Reuters about 85% of the trades on the Chinese stock market are retail. Therefore traditional methods to combat volatility may not be appropriate in this market</p></li>
<li><p>Access to China is limited so at present it is somewhat insulated with between 1 and 2% participation from international investors.</p></li>
<li><p>Despite China’s recent attempts, we know that free markets cannot be managed and we still expect to see a few rookie errors (for example “asking” State Owned Enterprises (SOEs) to buy stocks in order to prop up equity prices and restricting selling by large shareholders is unsustainable)</p></li>
<li><p>SOE reform is paramount to establishing confidence in equity markets and greater reform in this area remains vital if the Government is to succeed in its objective of internationalising the currency, opening up China’s capital markets and improving domestic resource allocation.</p></li>
</ul>
<p>China will soon realise that there is a tipping point when moving from a managed to a market economy and you can’t continue to stem the tide. Prices will set themselves.</p><img src="https://counter.theconversation.com/content/52903/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kathleen Walsh has received funding for previous research on RMB Internationalisation from the Australian Research Council, The Centre for International Finance and Regulation, The NSW Department of Industry, The Sydney Business Chamber and the Australian National University. The views and opinions expressed in this piece are her own and not necessarily shared by any of the above organisations.
</span></em></p>Market “hiccups” are painful for western markets, but a good sign of the internationalisation of Renminbi.Kathleen Walsh, Associate Professor of Finance, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/514672015-12-01T05:57:55Z2015-12-01T05:57:55ZIMF embraces the redback, but China reforms must go on<p>The Executive Board of the International Monetary Fund (IMF) has <a href="http://www.imf.org/external/np/sec/pr/2015/pr15540.htm">decided</a> to include the renminbi (RMB) in its basket of reserve currencies. The RMB, or yuan, has joined the US dollar, euro, British pound and Japanese yen to become the fifth member of the basket used to value the Fund’s own de facto currency, the Special Drawing Rights (SDRs).</p>
<h2>More than a membership</h2>
<p>On the surface, the impact of the decision looks <a href="http://www.afr.com/markets/chinas-new-reserve-currency-status-will-change-its-economy-20151129-glaoo5">relatively modest</a>. The value of the SDR will be based on a weighted average of the values of the basket of currencies. Only about 2.5% of the US$11.5 trillion of foreign reserve assets are held in the form of SDRs, of which the RMB is expected to account for 11% of the basket (higher than the yen and the pound).</p>
<p>Looking more broadly, however, the inclusion of the RMB (aka the “redback”) in the SDR’s currency basket is bound to have profound implications. </p>
<p>Apart from the RMB’s new acceptance in international trade, settlement and investment, the ultimate aim is to be accepted as a reserve currency, used by central banks to hold foreign exchange reserves. It is <a href="http://www.afr.com/markets/chinas-new-reserve-currency-status-will-change-its-economy-20151129-glaoo5">estimated</a> that the SDR inclusion should lead to about US$42 billion of reserve assets being rebalanced into the RMB by central banks and reserve managers, in the medium term.</p>
<p>According to the <a href="http://www.imf.org/external/np/sec/pr/2015/pr15540.htm">IMF</a>, the move is “an important milestone in the integration of the Chinese economy into the global financial system”. </p>
<p>It is also an important milestone in Beijing’s campaign to internationalise the yuan. As Robert Mundell, “father of the Euro”, <a href="http://www.imf.org/external/pubs/ft/fandd/2009/09/cohen.htm">declared</a>, “great powers have great currencies”. </p>
<p>For China, this is an essential step in fulfilling its ambition to crown the yuan a global reserve currency. In fact, the RMB is the first currency not issued by a major advanced economy to make it to the IMF basket. More importantly, the IMF’s decision comes at a crucial time for the Chinese leadership as it seeks to demonstrate to constituents international recognition of China’s rise as a global power.</p>
<h2>Whatever it takes</h2>
<p>The IMF’s RMB decision also sets a precedent for the SDR basket that a basket currency is not yet fully convertible and under capital control from its issuing country. This has led to <a href="http://www.ft.com/intl/cms/s/0/fd81211a-96a9-11e5-9228-87e603d47bdc.html?ftcamp=crm/email/20151129/nbe/AsiaMorningHeadlines/product#axzz3swLcm9uO">criticism</a> that the IMF is “bending the rules” in favour of China. </p>
<p>The IMF, on the other hand, sees the move as a reward of “the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems”. Indeed, the SDR inclusion has arguably been the most attractive lure for Beijing to undertake a series of reforms of China’s financial regime. </p>
<p>In order to meet the IMF’s criteria of “freely usable”, China took a “whatever it takes” approach. It liberalised domestic interest rates, aligned the RMB’s exchange rate more along its market value and opened up the interbank market to foreign central banks and sovereign funds. Its treasury even <a href="http://www.reuters.com/article/2015/10/15/china-yuan-offshore-idUSL3N12D1KK20151015">issued</a> short-term (three-month) bonds in order to complete the yield curve for RMB assets, which was seen as a prerequisite for the RMB’s SDR inclusion. Efforts have also been made via some closed-door financial diplomacy to lobby IMF member countries for the RMB’s case.</p>
<h2>The last mile</h2>
<p>Member countries and the market will now make preparations ahead of the October 1, 2016 date for inclusion of the RMB. It may be the last mile for the RMB’s SDR journey, but there is still a long way to go to launch the redback in the global arena.</p>
<p>Beijing may have convinced the IMF, but a more daunting challenge will be to convince the market. To do so, Beijing needs to demonstrate its commitment to continuing financial opening and liberalisation, to credible monetary management, and to independent decision making on the part of its financial regulators. In other words, the reforms must go on.</p>
<p>With the long awaiting inclusion of the RMB by the IMF, the external world has lost a vital leverage in empowering reformers and inducing domestic reform in China. Without external pressures, only the internal momentum of the reform will allow the RMB to walk the last leg towards true internationalisation.</p><img src="https://counter.theconversation.com/content/51467/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hui Feng does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The inclusion of the yuan into the IMF’s currency basket shouldn’t stop ongoing Chinese financial market reforms.Hui Feng, Research Fellow, Griffith Asia Institute and Centre for Governance and Public Policy, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460202015-08-12T20:35:59Z2015-08-12T20:35:59ZFans of a more open China should welcome the devalued yuan<p>China wants to be an international player, and to be an international power it needs the Chinese yuan to be an international currency. </p>
<p>Tuesday morning’s <a href="http://www.pbc.gov.cn/publish/english/955/2015/20150811090254817849287/20150811090254817849287_.html">announcement by the People’s Bank of China (PBC)</a> that it was reforming its daily USD/CNY (Chinese yuan) mid-point fixing mechanism was simply another step along the path to yuan internationalisation. Of course, it was a reform that was also very cleverly timed to weaken the yuan when a weaker yuan is just what China needs to slow the decline in Chinese exports.</p>
<p>The first big step towards internationalising the yuan came in 1994, when as part of a break from Communist state planning, Beijing let the currency fall by one-third. For the next decade, the Chinese authorities held to a hard peg that valued the US dollar at 8.28 yuan.</p>
<p>Then on July 21 2005, the People’s Bank of China announced it had removed the hard peg – a move which initially <a href="http://chinaperspectives.revues.org/607">served to push the dollar down</a> to 8.11 yuan. Since then, the yuan has continued to rise against the dollar, so that by July 2015, the Chinese currency had risen about 33% against the dollar over the decade.</p>
<p>Before Tuesday, China’s central bank set a midpoint for the value of the yuan against the dollar, called the daily fixing. The yuan is allowed to move 2% above or below the daily fixing in daily trading. But the PBC has never been clear on what criteria it takes into account when setting the daily fixing.</p>
<p>In particular, the PBC has sometimes ignored daily moves so that, for example, when the market indicates the yuan should be weaker against the dollar, the daily fixing is set to make it stronger. So the strategy of fixing the yuan has, for quite a while now, actually allowed it to <a href="http://www.wsj.com/articles/china-moves-to-devalue-the-yuan-1439258401">diverge considerably from the market rate</a>.</p>
<p>With Tuesday’s announcement, the fixing will now be much more aligned to the market, in that it will be based on how the yuan closes in the previous trading session. The most immediate result of this new policy on Tuesday was that the yuan’s fixing was <a href="http://www.wsj.com/articles/china-moves-to-devalue-the-yuan-1439258401">weakened by 1.9% from the previous day</a>, leaving it at 6.2298 to the US dollar, compared with 6.1162 on Monday. <a href="http://www.abc.net.au/news/2015-08-12/share-market-blindsided-dollar-slumps-as-yuan-devalued-again/6691458">Another 1.62% devaluation</a> was applied on Wednesday.</p>
<h2>Welcome to the free market</h2>
<p>So while US Republicans and much of the media are yet again declaiming against the undervaluation of the yuan – a nasty Chinese strategy to sell its goods at artificially cheap rates on the world market – in fact the yuan’s midpoint has now become much more market based. In other words, the PBC has done what longtime critics of China’s currency policy have long been clamouring for – let the market play a bigger role in deciding the yuan’s value.</p>
<p>In May 2015 the <a href="http://www.imf.org/external/np/sec/pr/2015/pr15237.htm">IMF recognised</a> that China’s yuan was <a href="http://www.wsj.com/articles/imf-official-says-chinese-yuan-no-longer-undervalued-1432634534">no longer undervalued</a> for the first time in more than a decade – a statement which contradicted the US Treasury Department’s assessment published just a month previously which said the currency remained <a href="http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Report%20to%20Congress%20on%20International%20Economic%20and%20Exchange%20Rate%20Policies%2004092015.pdf">“significantly undervalued”</a>.</p>
<p>The overall impact of the recent alteration in rate-setting policy and consequent devaluation? First, it is another step towards a more open and international Chinese economy. As <a href="http://www.bloomberg.com/news/articles/2015-08-12/imf-welcomes-china-s-new-yuan-mechanism-no-impact-on-sdr-push">recognised by the IMF</a>:</p>
<blockquote>
<p>“The exact impact will depend on how the new mechanism is implemented in practice. Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets’. </p>
</blockquote>
<p>How the new mechanism is implemented in practice will also influence the extent to which it will assist China’s desire to have the IMF declare the yuan an official reserve currency on par with the dollar, euro, the Yen and the Pound. According to the IMF:</p>
<blockquote>
<p>"The announced change has no direct implications for the criteria used in determining the composition of the [IMF’s SDR] basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.”</p>
</blockquote>
<h2>The real fallout</h2>
<p>In the short term, the change will give a shot in the arm to Chinese exports, especially to Europe. Chinese exports to Europe have suffered as the Chinese yuan has followed the US dollar in appreciating against the euro.</p>
<p>Another short-term impact will be the fluster that is caused in US politics. The devaluation of the yuan will pose a dilemma for the US Federal Reserve which is preparing to raise interest rates later this year, but is concerned by the continuing strength of the US dollar. Concern that is now deepened because the Chinese move puts further upward pressure on the dollar.</p>
<p>US <a href="http://thehill.com/policy/finance/250874-lawmakers-unhappy-after-china-devalues-yuan">politicians will also rail against</a> what they see as another example of China’s broken promises to refrain from intervening in exchange markets. After high-level talks with Chinese officials in June, US Treasury Secretary <a href="http://www.wsj.com/articles/china-agrees-to-limit-currency-moves-u-s-treasury-secretary-says-1435184347">Jacob Lew said China agreed</a> only to intervene in foreign exchange markets if absolutely “necessitated by disorderly market conditions”. </p>
<p>Coming straight after a series of State interventions in Chinese stock markets, the recent PBC announcement is not going to inspire US confidence that China is serious about putting the word “free” (beloved of Americans everywhere) together with the words “market forces”. Xi Jinping’s <a href="http://thediplomat.com/2015/02/mr-xi-goes-to-washington-chinas-president-to-visit-us/">forthcoming visit to Washington</a> should be interesting.</p>
<p>In the longer term, it is too early to tell whether recent volatility in China’s stock markets will actually delay full yuan convertibility as <a href="http://www.scmp.com/news/china/economy/article/1837341/chinas-market-volatility-likely-delay-full-yuan-convertibility">many analysts predicted.</a> The PBC announcement seems to be a message from China that it will not. And it should always be kept in mind that given the size of China’s economy, and the large size of its foreign exchange reserves, China can control its exchange rate more effectively than most countries can. </p>
<p>The main concern for the Chinese authorities is to retain control over <a href="http://www.economist.com/node/11639442">hot money flows</a> – speculative flows of money chasing interest and chasing currencies expected to appreciate. These cause greatest damage when they flow out of currencies expected to depreciate as occurred during the Asian Financial crisis of 1997, which China observed closely but was able to protect itself against.</p><img src="https://counter.theconversation.com/content/46020/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alice de Jonge does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US may not like it, but by devaluing the yuan the People’s Bank of China has done what longtime critics of China’s currency policy have long been clamouring for.Alice de Jonge, Senior Lecturer, International Law; Asian Business Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/425592015-05-29T14:35:49Z2015-05-29T14:35:49ZChina’s currency gets the IMF stamp of approval as it enters a new normal<figure><img src="https://images.theconversation.com/files/83383/original/image-20150529-15234-iyft5s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">"No longer undervalued"</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>China’s RMB has been deemed “no longer undervalued” <a href="http://www.imf.org/external/np/sec/pr/2015/pr15237.htm">by the International Monetary Fund</a>. This is a milestone for the Chinese government, which is keen to bolster domestic consumption and make the RMB a global currency. It is also significant in relations with the US, which has long-criticised Beijing’s currency policy for being undervalued, making it unfairly competitive in the global economy.</p>
<p>The RMB has been appreciating in value for a number of years – <a href="http://www.wsj.com/articles/imf-to-brighten-view-of-chinas-yuan-1430697814">30% in real terms since 2010</a>. But this is the first time that an important international organisation has declared that the Chinese currency has appreciated sufficiently. The IMF view was immediately shared by some government officials and influential experts in the US, <a href="http://www.ecns.cn/business/2015/05-28/167186.shtml">including Nicholas Lardy</a>, a well-known scholar on the issue. </p>
<p>A look at China’s latest trade figures supports the idea that their currency is at fair value and represent the shifting nature of the Chinese economy. In the first four months of 2015, the volume of China’s international trade contracted sharply by over 7% and in April, the volume of exports dropped by <a href="http://www.wsj.com/articles/china-exports-unexpectedly-fall-in-april-1431052340">more than 6%</a>. This marks a stunning turnaround for a country where exports had been growing by <a href="http://www.tradingeconomics.com/china/exports">more than 20% a year</a> in the first decade of the 21st century.</p>
<p>Of course, other factors have affected this poor performance in world trade. Domestically, the costs of production have risen and there has been need for structural changes in the Chinese economy, to upgrade its industry and control pollution. And there has been a slump in global demand since the global financial crisis. But the growing strength of the RMB has also played a role and the fact that China is looking to shift away from having an export-led economy.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/83381/original/image-20150529-15221-1kdy6qk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The steady rise of the RMB against the US$ over the last decade in nominal terms.</span>
<span class="attribution"><a class="source" href="http://www.xe.com/currencycharts/?from=CNY&to=USD&view=10Y">XE.com</a></span>
</figcaption>
</figure>
<p>This should be good news for China’s trading partner critics such as the US senators who <a href="http://www.washingtonpost.com/business/economy/as-senate-targets-currency-manipulators-economists-say-step-is-unnecessary/2015/05/14/56dd70d0-f9b9-11e4-a13c-193b1241d51a_story.html">recently passed a bill</a> taking aim at “egregious and prevalent” currency manipulation by foreign countries. What was formerly a thorn in the side of trade discussions between the US and China should no longer be such an issue going forward.</p>
<h2>Important gesture</h2>
<p>China will see the IMF’s statement as an important gesture of support for its effort to make RMB a global currency, particularly to have it included in the international <a href="http://www.imf.org/external/np/exr/facts/sdr.htm">“special drawing rights” (SDR) basket</a>. The SDR is an international reserve asset whose value is based on a basket of four key international currencies. The present members of the SDR basket include the US dollar, the pound sterling, the Euro and Japanese yen.</p>
<p>China is keen to be included in this basket and has an increasingly strong case for it. China has been the world’s second largest economy <a href="https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:CHN:USA:IND&hl=en&dl=en">based on GDP</a> after the US since 2010 and the world’s largest economy <a href="http://www.bbc.co.uk/news/magazine-30483762">based on purchasing power parity</a>. Its current GDP is twice as large as Japan’s and almost four times as large as the UK’s. In addition, China is currently the world’s largest exporter of goods and foreign exchange reserves. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=323&fit=crop&dpr=1 600w, https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=323&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=323&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=406&fit=crop&dpr=1 754w, https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=406&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/83392/original/image-20150529-15250-bxmk4t.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=406&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">GDP of US, China, Japan and the UK.</span>
<span class="attribution"><a class="source" href="https://www.google.co.uk/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:CHN:USA:IND&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=region&idim=country:CHN:USA:JPN:GBR&ifdim=region&tstart=328402800000&tend=1369782000000&hl=en_US&dl=en&ind=false">World Bank</a></span>
</figcaption>
</figure>
<p>So there is a logical and powerful reason for the RMB to become a new member of the SDR basket. And <a href="http://www.imf.org/external/np/sec/pr/2015/pr15237.htm">according to the IMF’s first deputy managing director</a>, the question is not whether it will be, but when the RMB will be included.</p>
<p>With its economy struggling to reach the 7% growth target for the year, China faces a challenge going forward of maintaining the stability of the RMB exchange rate while boosting growth. Any monetary and fiscal policy shifts will have to take this into account as further appreciation of the RMB might suppress exports too drastically and it won’t devalue it because it wants to see it included in the SDR basket. But it is all part of transitioning to a new economic normal – even if it means slower growth.</p><img src="https://counter.theconversation.com/content/42559/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shujie Yao does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China’s RMB has been deemed “no longer undervalued” by the International Monetary Fund. This is a milestone for the Chinese government, which is keen to bolster domestic consumption and make the RMB a…Shujie Yao, Professor of Economics and Chinese Sustainable Development, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/343502014-11-18T19:23:52Z2014-11-18T19:23:52ZThe China FTA and the rise of the redback<figure><img src="https://images.theconversation.com/files/64792/original/mzxp7z53-1416280507.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All eyes are on the renminbi.</span> <span class="attribution"><span class="source">David Dennis/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Australia’s free trade deal with China will invariably boost bilateral trade and investment. But how trade and investment are settled also matters. Given the rise of the renminbi (RMB) in recent years, the China FTA will further add momentum to the RMB going global, and Australia is well positioned to ride the wave.</p>
<p>Since 2009, Beijing has been deploying its resources strategically on a campaign to lift the RMB’s global clout in both trade and financial terms. According to <a href="http://www.swift.com/about_swift/shownews?param_dcr=news.data/en/swift_com/2014/PR_RMB_Jan.xml">data from SWIFT</a>, the RMB strengthened its position as the seventh-ranked global payments currency and the second-most-used currency for trade financing by October 2014. In September 2014, the value of RMB global payments increased by 13.2%, well above the average 8.1% growth for all currencies.</p>
<p>But there is still huge potential for the RMB in global transactions given China’s share in world trade. Today the RMB accounts for less than 2% of global payments.</p>
<h2>Huge potential for Australia</h2>
<p>The Australian government has rightly identified the strategic importance of the Chinese currency. The Reserve Bank of Australia (RBA) signed a bilateral currency swap agreement with its Chinese counterpart, the People’s Bank of China (PBoC), in March 2012.</p>
<p>The agreement allows exchange of local currencies of up to A$30 billion (RMB 200 billion). The deal is the largest that China has signed other than those with Hong Kong and South Korea. It is also one of the first with a Western economy. </p>
<p>In April 2013 Australia and China began direct conversion between the yuan and Australian dollar (instead of using the US dollar as medium). That makes Australia the third country after the United States and Japan to have its currency directly converted to the RMB. </p>
<p>Some 5% of Australia’s foreign currency reserves is already parked in RMB-denominated Chinese government bonds. This means the RBA is joining a small but growing band of central banks that have looked to China to diversify their foreign reserves. Australia is also among the top five countries in the world using RMB for trade finance.</p>
<p>Nevertheless, the use of RMB in settlement is still relatively limited in Australia’s bilateral trade with China. In February 2014, for example, 14.2% of payments between Australia and China/Hong Kong were in RMB, but as the SWIFT data indicates, 98% of these payments in value were institutional, as opposed to payments sent by banks on behalf of their customers. </p>
<p>This suggests RMB has been mainly used for investments and foreign exchange activities, rather than trade settlement. In fact, currently only 4% of settlements in China are in RMB (and only 1% of those involving an Australian counterpart). The Chinese government plans to increase this proportion to 15% by 2015.</p>
<h2>The FTA</h2>
<p>This is where the free trade agreement kicks in. An enlarged scale of bilateral trade will most likely increase the propensity of Australian organisations to invoice, settle and finance trade with China in RMB. At the same time, China has rolled out a series of complementary measures to facilitate the use of the RMB in trade and investment.</p>
<p>First, the RBA and the PBoC have agreed to establish an official RMB trading hub in Sydney. The latter will announce the designated clearing bank shortly. This clearing arrangement, in addition to the settlement services provided by the ASX and the Bank of China, will provide an operational platform for Australian importers and exporters to carry out more direct trading with their Chinese counterparts in RMB.</p>
<p>It means more efficient and rapid settlement of RMB payments, savings on invoicing costs, reduction of exchange-rate risk and reach to more Chinese customers and investors who prefer to trade in their currency. Sydney could be joining Hong Kong, Singapore and London as a global offshore RMB centre.</p>
<p>At the same time, China has sought to increase the attractiveness of the RMB through financial opening and diversifying investment channels for offshore RMB deposits, so that foreign entities can get decent returns on their RMB holdings. </p>
<h2>New liberalisation</h2>
<p>What is notable on this front is that, on the same day as the FTA announcement, a cross-border investment channel was established that could mark the beginning of the end of China’s decades-long capital control. </p>
<p>The <a href="http://www.reuters.com/article/2014/11/16/us-hongkong-shanghai-stock-connect-idUSKCN0J00ZC20141116">Shanghai-Hong Kong Stock Connect</a> is a pilot program that for the first time links foreign investors with China’s vast domestic stock market without individual approval. Previously, foreign investors could only participate indirectly in China’s securities markets through certain investment fund products.</p>
<p>With the launch of Stock Connect, investors will be able to trade eligible Shanghai-listed A-shares directly. This could well be a milestone of financial liberalisation in China.</p>
<p>All trades under the program will be done in RMB. The expected outflow of RMB from mainland China and inflow from overseas (through Hong Kong) will establish a healthy ecosystem for the Chinese currency. It will also expand and diversify investment channels for overseas RMB holdings, helping to further facilitate its internationalisation.</p><img src="https://counter.theconversation.com/content/34350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hui Feng does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s free trade deal with China will invariably boost bilateral trade and investment. But how trade and investment are settled also matters. Given the rise of the renminbi (RMB) in recent years…Hui Feng, Research Fellow Griffith Asia Institute, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/342572014-11-17T14:03:16Z2014-11-17T14:03:16ZOne small link for Shanghai and Hong Kong is a big opportunity for the Chinese economy<figure><img src="https://images.theconversation.com/files/64608/original/wkp35vxp-1415985993.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A new dawn for Shanghai, which is now open for more international business.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/wolfgangstaudt/3553970754">Wolfgang Staudt</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>A direct link has <a href="http://www.reuters.com/article/2014/11/17/us-hongkong-china-stocks-idUSKCN0J00Z820141117">been established</a> between Hong Kong and Shanghai’s stock exchanges. The so-called Stock Connect means investors in Hong Kong can now buy shares listed on the Shanghai Stock Exchange via their local brokers and vice versa. This is a milestone moment for China as it further opens the door to investors, liberalises its capital market and promotes the internationalisation of its currency, the RMB, through the two-way share dealings of investors in both markets.</p>
<p>Established in 1990, the Shanghai stock market has experienced a bamboo-dancing style development process in the last quarter century. After reaching a bubbly peak of 6,124 points in November 2007, the Shanghai Stock Exchange Composite Index crashed to its <a href="http://www.nottingham.ac.uk/cpi/documents/briefings/briefing-41-chinese-stock-bubble.pdf">lowest point two years later at 1,614 points</a>. Although it has recovered now to more than 2,400 points, the Shanghai stock market has been highly volatile over the past seven years.</p>
<p>Investors in mainland China have more or less given up hope in its stock markets for <a href="http://www.docin.com/p-474255192.html">various reasons</a>. Regulation has been inefficient or even counterproductive, government policies poor, with badly performing state-owned enterprises being dressed up to be listed in a short period of time. There are also problems of cheating in the industry in China, with insider trading, overstating of profits and performance commonplace, a lack of social responsibility on the part of listed companies, and irrational investor expectations.</p>
<p>To rebuild confidence in investors, China’s regulator, the <a href="http://www.csrc.gov.cn/pub/csrc_en/">China Securities Regulatory Commission</a>, has tried implementing reforms to improve market efficiency and firm performance, but the results have been disappointing. This partly explains why in April 2014 China’s premier, Li Keqiang, announced that the Shanghai and Hong Kong Stock Exchanges will be linked as a new reform effort to strengthen the Chinese capital market.</p>
<h2>Profound impact</h2>
<p>The impact on China’s capital market may be profound. It will accelerate the internationalisation of the RMB and will support Hong Kong’s position as the largest offshore RMB settlement market in the world.</p>
<p>The new link will also enhance China’s ability to raise capital for the country’s economic and social development, as well as improving the competitiveness of both the Hong Kong and Shanghai stock markets in the world.</p>
<p>Finally, the legal and regulatory systems as well as the professional practices of the Hong Kong Stock Exchange will soon be adopted by its Shanghai counterpart. This will help restore confidence in the mainland stock markets. All in all the position of Shanghai and Hong Kong as two major financial centres will be strengthened. </p>
<h2>Big opening</h2>
<p>China has been gearing toward this <a href="http://www.ecb.europa.eu/press/key/date/2014/html/sp140226.en.html">since 2005</a> when the central government decided to liberalise the exchange rate of RMB in the hope that it will eventually become a world currency. Poor stock market performance and a lack of investor confidence mean that people in China do not have a reliable investment channel for their savings, leading to low economic efficiency for the entire national economy. It is hoped that the link will not only help the RMB to be more recognised globally but also restore investor confidence in the domestic stock markets. </p>
<p>This trading mechanism will open a huge window for China’s currency to flow through the stock markets. In the long term, shares in Hong Kong may even be priced in RMB, instead of Hong Kong dollars. Foreign investors will be able to gain access to the Chinese capital market through Hong Kong, so holding RMB will be similar to holding British pounds or US dollars.</p>
<p>The initial reaction to the news of this trading mechanism has been largely positive in Hong Kong and Shanghai. Hong Kong stocks were down on the first day, but the <a href="http://www.bloomberg.com/quote/SHCOMP:IND">Shanghai Composite Index</a> has risen more than 10% in the past two months. In the longer-run, we can expect this new link to boost the average daily value of stock trading, as well as marking another crucial step in the liberalisation of China’s capital market and desire to make RMB a global currency.</p><img src="https://counter.theconversation.com/content/34257/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shujie Yao receives funding from the EU, the Leverhulme Trust and the British Academy.</span></em></p>A direct link has been established between Hong Kong and Shanghai’s stock exchanges. The so-called Stock Connect means investors in Hong Kong can now buy shares listed on the Shanghai Stock Exchange via…Shujie Yao, Professor of Economics and Chinese Sustainable Development, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/323852014-10-01T19:44:44Z2014-10-01T19:44:44ZBeyond the fog of tear gas, Hong Kong’s future remains with China<p>“Nothing lasts forever – even the longest, most glittering reign must come to an end someday.” And so it was that Britain’s celebrated fictional Machiavellian mastermind Francis Urqhuart greeted viewers in the BBC’s original House of Cards. </p>
<p>It was the collapse of Margaret Thatcher’s once mighty support in the Parliamentary Conservative Party that brought about our pragmatist’s now infamous soliloquy.</p>
<p>So it was too in 1997, that the Prince of Wales presided over the final lowering of the Union Flag at Hong Kong’s Victoria Harbour in a special ceremony to mark the handover of the then British colony to Chinese sovereignty. </p>
<p>The fate of great empires and Margaret Thatcher are two things that still loom large over Hong Kong’s future. </p>
<p>Throughout China, the Iron Lady is remembered as the British premier who, together with China’s then paramount leader Deng Xiaoping “righted a wrong” by returning Hong Kong to the People’s Republic and sealed the territory’s political destiny. </p>
<p>Both China and Britain have evolved into vastly different polities and economies since Thatcher and Deng effectively consigned the last vestiges of the British Empire to history. </p>
<p>China’s economy is now three times the size of Britain and is home to the most spectacular transformation of economic wealth in the history of human civilisation. </p>
<p>Although there are signs of a domestic recovery from the lows of recession, Britain continues to be affected by issues facing the Eurozone and a near collapse of the Union itself brought about by the recent bungled referendum on Scottish independence.</p>
<h2>Fading role as an economic enabler</h2>
<p>Hong Kong too, once a prized gateway into a lucrative mainland of untapped treasure, has lost its appeal as an enabler of investment between China and the outside world. </p>
<p>Hong Kong faces a significant economic, social and political crisis that goes well beyond universal suffrage and strikes at the core of its identity and what it means to be both Chinese and a Hongkonger in 21st century China. </p>
<p>It would be all too easy if this were simply a humble struggle for a democracy promised in Hong Kong’s Basic Law. But things are never so clear cut – this is a social, cultural and economic battle played out as a clash of modernities between a distant colonial orient of the old world and an assertive new Chinese order. </p>
<p>Months before the current wave of unrest, I wrote on <a href="https://theconversation.com/weibos-us-listing-tweeting-the-end-of-the-hong-kong-ipo-23722">several</a> <a href="https://theconversation.com/looking-past-doomsday-rhetoric-chinas-free-trade-zones-22474">occasions</a> that a disturbing undercurrent of resentment and bitterness towards mainlanders is a routine part of life in the Special Administrative Region. </p>
<p>Be it imposing bizarre <a href="http://www.ft.com/intl/cms/s/0/c3558aa0-6c7f-11e2-b774-00144feab49a.html">restrictions on the amount of milk powder</a> Chinese tourists can take out of the territory, <a href="http://www.tealeafnation.com/2014/04/bladdergate-conflicts-between-hong-kong-and-mainland-intensify/">a war of words on social media about toilet etiquette</a>, or <a href="http://www.scmp.com/news/hong-kong/article/1429205/hong-kong-protesters-tell-mainland-chinese-tourists-go-home?page=all">angry protests</a> telling “locust” mainlanders to head back over the border, this remarkable social tension has been <a href="http://www.economist.com/node/21546051">brewing for years</a>. </p>
<p>For a good six months last year, the most popular story on HK’s flagship South China Morning Post was <a href="http://www.scmp.com/news/china/article/1251239/why-are-chinese-tourists-so-rude?page=all">‘Why are Chinese tourists so rude?’</a> Readers will spot the article has been shared and liked over 10,000 times on Facebook.</p>
<h2>Fraught relations despite a common heritage</h2>
<p>So how did it get to this? How could relations descend to such lows between a people at least theoretically united by an overarching sovereign state and more importantly, a common cultural and ethnic heritage? </p>
<p>No, Hong Kong has been plagued by an increasingly open mainland eroding much of the territory’s historic competitiveness - and the stark reality that the small and overpopulated city is running out of room. </p>
<p>As China opens more free trade zones, adopts a more readily convertible currency and moves to more globally accepted trade and investment practices, much of Hong Kong’s appeal is naturally fading – where companies once needed to use it as a platform to do business in the mainland, they can now go there directly. </p>
<p>Importantly, big-ticket mainland IPOs, for so long the backbone of Hong Kong’s exchange and a big part of its status as a major Asian financial hub, are <a href="https://theconversation.com/weibos-us-listing-tweeting-the-end-of-the-hong-kong-ipo-23722">increasingly overlooking the territory</a> and pursuing listings on North American and British equity markets. </p>
<p>Tensions are growing with reports of mainlanders buying property in Hong Kong putting further pressure on its notoriously limited supply, and hordes of <a href="http://usatoday30.usatoday.com/news/world/story/2012-02-14/chinese-mainland-pregnant-women-hong-kong/53159886/1">pregnant mainlanders flocking to the city to give birth</a>, as well as a new wave of <a href="http://www.scmp.com/news/hong-kong/article/1352943/chinese-students-flood-hong-kong-universities-graduate-programmes?page=all">top notch competition for university places</a>.</p>
<h2>A future linked with China</h2>
<p>At a cultural level there is tension too. </p>
<p>Where ancestor worship and household shrines fell victim to atheist Mao’s Cultural Revolution, these practices are still very much part of Hong Kong’s expression of traditional Chinese culture. Where complex traditional Chinese characters were simplified in the mainland in the interests of promoting mass literacy to a post-liberation proletariat, so these bastions of the imperial literati elite proudly remain in Hong Kong. </p>
<p>Yet the economic interdependence is staggering - China accounts for <a href="http://www.tourism.gov.hk/english/statistics/statistics_perform.html">75% of all tourist arrivals</a> in Hong Kong and <a href="http://www.hktdc.com/mis/coi/en/s/overview.html">more than 60% of China’s entire overseas foreign direct investment footprint</a>. Although China’s rise has firmly put a dent in much of what made Hong Kong prior to 1997, the mainland is as much of a blessing to the territory’s future as it is a curse. </p>
<p>Hong Kong earned its stripes as a gateway to the very place and people that many of its citizens seem to cast as a thorn in the side of its future freedom and prosperity. </p>
<p>Surely the territory recognises its destiny is inextricably tied to China and the current unrest will inevitably subside – after all nothing lasts forever does it?</p><img src="https://counter.theconversation.com/content/32385/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Laurie Pearcey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“Nothing lasts forever – even the longest, most glittering reign must come to an end someday.” And so it was that Britain’s celebrated fictional Machiavellian mastermind Francis Urqhuart greeted viewers…Laurie Pearcey, Director - China Strategy & Development, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/288782014-07-08T05:11:16Z2014-07-08T05:11:16ZWhy dollar dominance is secure despite growth of global rivals<figure><img src="https://images.theconversation.com/files/53209/original/fcdq2pb7-1404752804.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In the eye of the beholders, dollar dominance rules.</span> <span class="attribution"><a class="source" href="http://www.welovecostarica.com/watching/">http://www.welovecostarica.com/watching/</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In imploring the world to be less dependent on the US dollar for international transactions, <a href="http://www.bloomberg.com/news/2014-07-06/france-says-boosting-use-of-euro-is-issue-of-global-balance-.html">French finance minister Michel Sapin is expressing a wish</a> that many of the euro’s creators hoped would already be reality. </p>
<p>Backed by the bosses of some major French companies, Sapin argues in a Financial Times interview that Europe should break free from the longstanding use of the dollar for international commodity and goods transactions, and as the intermediary currency for foreign exchange trade. At present, the FT reports, half of all cross-border borrowing and lending and 87% of forex trade is conducted in US$, which also make up 60% of the reserves held by the world’s central banks.</p>
<p>On the face of it, it’s not an outlandish idea. Europe can claim to be a bigger unified economic space than the US, and in some ways it is more structurally balanced. The Eurozone’s current account has recently moved <a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06062014-AP/EN/2-06062014-AP-EN.PDF">slightly into surplus</a>, in contrast to the chronic US deficit. As a result, Europe avoids an American-style reliance on capital inflows to pay its way. Critics say it’s only the dollar’s reserve currency status that allows America to get away with this – uniquely borrowing abroad in its own currency, at near-zero interest rates. This, some allege, also enabled the massive international “imbalances” which led to the 2007/8 crash, and <a href="http://dgff.unctad.org/chapter2/2.html">have not been corrected by it</a>. A “rebalancing” of the world economy, by switching global payments away from the dollar, is part of Sapin’s plea.</p>
<h2>Currency rivalry</h2>
<p>Unfortunately for the Eurozone, and other aspiring economic blocs in Asia and Latin America, the dollar’s status as reserve currency is more than an outmoded historical artefact. The US economy may no longer be the world’s biggest, if Europe is treated as a single commercial space. But the way that space has been constructed makes the euro a very pale substitute for the <a href="http://www.investopedia.com/terms/g/greenback.asp">greenback</a>. Euro-denominated debt is still backed by its national issuers, not the whole Eurozone, meaning that the European Central Bank (ECB) lacks the guarantee and lender-of-last-resort powers of the Federal Reserve – even if the ECB governor might pledge to do “whatever it takes” to <a href="http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html">preserve the Euro by supporting debts</a> issued in it.</p>
<p>That pledge has helped to stabilise the Eurozone by reining-in the interest rate premium being paid by its weaker peripheral members. But the austerity imposed on those members, and the deflationary bias this creates across the whole area, means that – for the foreseeable future – Eurozone growth is destined to be significantly slower than the US and other countries with a <a href="http://www.oecd.org/eco/outlook/Handout-English-May-2014.pdf">truly unified currency</a>. The UK (with or without Scotland) could, improbably, overtake Germany in economic size if the <a href="http://www.theguardian.com/business/2013/dec/26/britain-europe-top-economy-by-2030">widely-forecast growth differential is not corrected</a>. France, although not a problem debtor, is stuck on a <a href="http://www.oecd.org/economy/france-economic-forecast-summary.htm">particularly lacklustre growth path</a>, despite Sapin’s best efforts.</p>
<p>This means the US$ will remain the obvious currency in which to hold assets and reserves, which in turn makes it the easiest currency for trading primary commodities and other goods and services. US dollar bonds give the holder a call on what is still the world’s largest and most reliable tax base, even when (or if) China overtakes it in absolute GDP. The need to narrow its fiscal and external deficits is making the US more fiscally assertive abroad – extending its tax net, and escalating the punishment of those who hide their assets or use corrupt practices to win foreign contracts. <a href="http://www.reuters.com/article/2014/06/04/bnpparibas-france-idUSL6N0OL19J20140604">Fines imposed by the US on a French bank</a> (for helping sanctions evasion) were one of the triggers for Sapin’s outburst. Yet it’s the Eurozone’s financial transaction tax proposal that is <a href="http://www.ici.org/viewpoints/view_13_ftt_extraterritorial">raising most hackles about extra-territoriality</a>.</p>
<h2>US USP</h2>
<p>The US will continue to wield such power, knowing that it has preserved the virtuous circle (strong dollar demand enabling faster growth that reinforces dollar preference) and that it must underline its tax-raising strength in order to keep doing so.</p>
<p>Recent stand-offs between the president and Congress show that the <a href="http://www.nytimes.com/2013/10/01/us/politics/congress-shutdown-debate.html?pagewanted=all&_r=0">US federal budget isn’t problem-free</a>. But at least it exists – and is large enough to administer a meaningful fiscal stimulus when recession threatens. That’s something the Eurozone still has to leave to member states, of which the only one empowered to run a countercyclical deficit <a href="http://www.telegraph.co.uk/finance/economics/10758577/Germany-risks-EU-fines-with-record-current-account-surplus.html">insists on surpluses that only prolong the surrounding downturn</a>.</p>
<p>Even if the US economy loses its global pre-eminence, too much of the world’s wealth is tied up in dollars for any country to favour more than a marginal shift away from it. If China, Japan, the Gulf states or other major holders of dollar debt wish to switch to other currencies on a large scale, they will need to do it gradually. A rush for the exits would not only <a href="http://blogs.marketwatch.com/fundmastery/2011/04/25/can-china-really-dump-the-dollar/">devalue their investments</a>, but also undermine external trade that will remain reliant on the US market, given Europe’s self-containment and slow growth. </p>
<p>The euro may, despite its zone’s subdued economy, incrementally raise its share of global transactions. The world’s investors have an appetite for Europe’s single currency which it has been slow to sate, because of its aversion to centralised borrowing. China’s biggest sovereign wealth fund, among others, has made clear its willingness to buy more euro debt, <a href="http://www.cnbc.com/id/101699639#">if the ECB can provide it</a>. But the Eurozone’s ability to do so remains fundamentally constrained by its design. And China’s desire to invest abroad also confirms that, despite the impressive absolute size of its economy, its own renminbi (RMB) is a long way from significant international status. For this it would need (among other American characteristics) a <a href="http://www.voxeu.org/article/renminbi-will-become-reserve-currency-within-next-decade">more open capital account and flexible exchange rate</a>, a much more transparent domestic financial system, and stronger assurance that it is not about to repeat Japan’s bubble-bursting lapse into stagnation. By letting its monetary resources finance US stimulus, China has ensured the dollar will stay dominant for at least another decade.</p><img src="https://counter.theconversation.com/content/28878/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In imploring the world to be less dependent on the US dollar for international transactions, French finance minister Michel Sapin is expressing a wish that many of the euro’s creators hoped would already…Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/207082013-11-26T03:44:17Z2013-11-26T03:44:17ZChina is liberalising its banks, and that’s good news for Australia<figure><img src="https://images.theconversation.com/files/36002/original/p9b7kp8m-1385346592.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A freer flow of money in and out of China presents opportunities for Australia.</span> <span class="attribution"><span class="source">SimonQ/Flickr</span></span></figcaption></figure><p>China has signalled its intention, reiterated in the recent Third Plenum, to open up its financial markets. This would be an important reform which carries significant risks and opportunities both for China, and many opportunities for Australia.</p>
<p>There are two main elements to the reforms. The first is to remove many of the regulated prices in the domestic financial system and to allow markets more scope to set them. The second is to float the Renminbi and allow freer international flows of capital. Both carry substantial risks.</p>
<p>Until recently bank lending and deposit rates, and hence bank net interest margins, were heavily regulated. The effect was to guarantee bank margins and protect the (mainly government owned) banks from much of the low quality lending they had engaged in during the 1990s.</p>
<p>With the deposit rate set artificially low, funds were cheap. Over time however less-regulated financial institutions found ways to offer higher returns to depositors. Many of these wealth management products were effectively deposits in that they could be readily turned back into cash. China has thus seen a rapid growth in its shadow banking system as a result.</p>
<p>The deregulation of lending rates squeezed the banks. Since they were forced to pay a below-market price for deposits but had to compete in lending, their margins have been under pressure. </p>
<p>Deregulating deposit rates is the next big step. But regulators are worried about whether the banks will cope with competition for deposits. The risk of bank failure increases significantly.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=901&fit=crop&dpr=1 600w, https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=901&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=901&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1132&fit=crop&dpr=1 754w, https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1132&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/36004/original/p64987xg-1385346965.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1132&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chinese banks have been limited in the products they can offer, spurring on a large shadow banking sector.</span>
<span class="attribution"><span class="source">gaobo/Flickr</span></span>
</figcaption>
</figure>
<p>China currently limits its banks to only lend out a fixed proportion of their deposits, that is the volume of their deposits always exceeds the value of loans they make – unless they make very poor lending decisions. The deregulation of deposit rates puts this at risk. It is now far more likely that banks will fail, and depositors lose money. Since China does not have a deposit insurance system, this is a significant risk.</p>
<h2>Protecting depositors</h2>
<p>China is currently working on developing the required deposit insurance scheme. We are unlikely to see the deregulation of deposits until that is in place. Even that though does not end the problems.</p>
<p>The transition of banks from only having to worry about the quality of their assets (loans extended) to also having to worry about their liabilities (deposits and other forms of funding) is problematic. </p>
<p>Australia <a href="http://penguinunearthed.wordpress.com/2006/04/02/book-review-westpac-the-bank-that-broke-the-bank/">almost lost</a> one of our major banks (Westpac) in the process of adjusting to a liberalised financial system, although there is little doubt that the economy functions better now than it did in the 1980s.</p>
<p>The implicit trade-off between the additional growth generated by a better allocation of resources valued against the risk of more frequent crises has generally come down in favour of liberalisation (see for example Ranciere, Tornelland and Westerman’ paper “Systemic Crises and Growth” in the Quarterly Journal of Economics, February 2008). </p>
<p>Those with longer memories will also remember many Australians losing money when they took out loans in foreign currencies just before a big fall in the Australian dollar. Some elements of the Asian crisis were also worsened by foreign currency borrowing as countries (partially) liberalised their capital accounts.</p>
<p>Both the internal reforms and the floating of the currency provide opportunities. While Australian banks, wealth managers and insurers have struggled to get a strong foothold in China in the face of strict regulation, that should change with the next phase of reform.</p>
<p>The biggest opportunities for Australia however will derive from the opening up of the Chinese capital market to the freer flow of money in and out of the country. Recent <a href="http://www.imf.org/external/pubs/ft/wp/2013/wp13189.pdf">work by the IMF</a> suggests while it’s hard to see whether China will finish up importing or exporting capital, the size of the flows both inward and outward will increase significantly. Chinese will seek to diversify their portfolios away from China, and foreigners will try to increase their exposure to China.</p>
<p>The IMF paper actually suggests that Chinese will increase their current foreign asset holdings by a factor of five, and that foreign holdings of Chinese assets will increase by a factor of three. That is, China will be a net foreign investor. </p>
<p>Australia will have to get used to the idea of Chinese companies and individuals continuing to buy local assets. This should bid up the price of assets, which is good for their owners, but is likely to raise community concern. There will obviously be sizeable business opportunities involved in servicing this outflow. </p>
<p>The other flow is also important. Australian wealth managers, and Australian companies, will have very significant business opportunities servicing the outward flow. </p><img src="https://counter.theconversation.com/content/20708/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>China has signalled its intention, reiterated in the recent Third Plenum, to open up its financial markets. This would be an important reform which carries significant risks and opportunities both for…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/132212013-04-04T19:34:24Z2013-04-04T19:34:24ZWhat would a Chinese currency conversion deal mean for Australia?<figure><img src="https://images.theconversation.com/files/22056/original/xr59x8cy-1365049606.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A currency conversion deal between Australia and China, which would allow the renminbi to be traded directly against the Australian dollar, would slash costs for thousands of businesses.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Julia Gillard leaves Australia for China tomorrow, her second trip to the Middle Kingdom as Prime Minister. As befits China’s status as Australia’s most important trading partner, the trip has attracted widespread media attention and speculation abounds regarding what policy announcements might be at hand.</p>
<p>One in particular has aroused interest: a currency deal that would allow the Australian dollar to be traded directly against the Chinese currency, the renminbi (RMB). Such a development has been hailed as a move that would <a href="http://www.theaustralian.com.au/national-affairs/foreign-affairs/pm-set-to-sign-china-currency-deal-in-boost-to-exporters/story-fn59nm2j-1226609244139">slash costs for thousands of businesses</a>.</p>
<p>Before discussing the implications of such a move, it is important to be clear about what exactly is being proposed.</p>
<p>Historically, China has only allowed the renminbi (RMB) to be traded directly against the US dollar. That is, there exists a foreign exchange market where the renminbi and US dollar are bought and sold, and the price at which they are traded represents the RMB/$US exchange rate. The <a href="http://www.x-rates.com/table/?from=CNY&amount=1">current rate</a> is 6.201832.</p>
<p>This rate moves up and down in response to changing demand and supply conditions in the market. For example, if foreign investors became more bullish about China, this would lead to an increase in demand for renminbi, causing the above number to fall. Of course, we also know that one of the main forces impacting on demand and supply conditions in this particular market is the Chinese government’s penchant for intervention, such as increasing the demand for US dollar in order to slow any such appreciation in the Chinese currency.</p>
<p>Yet despite China only allowing the renminbi to be traded directly against the US dollar, it is still possible to find quotes for an RMB/$AUD rate. The current rate is 6.48454. How can a RMB/$AUD rate be quoted in the absence of a market where the two currencies are traded?</p>
<p>The answer is that the RMB/$AUD rate is arrived at indirectly. In the $USD/$AUD market, the <a href="http://www.x-rates.com/table/?from=AUD&amount=1">current rate</a> is 1.045585. This means that $AUD1 buys $USD1.045585, and $USD1.045585 buys RMB6.484542 (1.045585*6.201832). Therefore, the quoted RMB/$AUD rate is that $AUD1 buys RMB6.48454.</p>
<p>What is now being proposed is the creation of a new foreign exchange market where the renminbi and Australian dollar can be traded directly in the same way that the renminbi and US dollar have long since done. The price in this market will then represent the RMB/$AUD exchange rate.</p>
<p>Such a move would continue the trend begun last year, whereby China allowed the renminbi to begin trading directly against the Japanese Yen.</p>
<p>For Australia, there are two main advantages in having the renminbi and Australian dollar trade directly against each other.</p>
<p>Firstly, trading in foreign exchange markets is not costless. Having a RMB/$AUD market means that only one trade needs to be executed, as opposed to two the moment. This is mainly where the cost savings being touted for Australian businesses lie.</p>
<p>Secondly, the presence of an RMB/$AUD market means that the RMB/$A rate can, at least in theory, better reflect developments in the two countries, irrespective of what is happening in the US. For example, for a variety of reasons, the Chinese government has shown an unwillingness to let the RMB/$USD rate fluctuate significantly. What this has meant is that any fluctuations in $USD/$AUD rate have also resulted in fluctuations in the RMB/$AUD rate, because it is calculated indirectly.</p>
<p>For China, the establishment of a RMB/$AUD market brings other benefits, such as furthering the <a href="http://www.rba.gov.au/publications/bulletin/2012/jun/9.html">internationalisation of the renminbi</a>.</p>
<p>While the establishment of an RMB/$AUD market is a positive step in view of the large volume of trade between China and Australia, excitement ought to be tempered for a number of reasons.</p>
<p>Firstly, the status quo is not particularly onerous for businesses because the RMB/$USD and $USD/$AUD markets are highly liquid. Fluctuations in the $US/$AUD rate can also be readily hedged against. In contrast, liquidity will be an issue for the new RMB/$AUD market, at least initially. This is where currency swap agreements such as the one signed last year between the <a href="http://www.afr.com/p/national/historic_pact_seals_china_ties_3EnHQZQ0Awvcj176ecKMjM">Reserve Bank of Australia and the People’s Bank of China</a> may turn out to be important, because they can be drawn up to provide additional liquidity if needed.</p>
<p>Secondly, the renminbi is already convertible for trade transactions and, as economists such as <a href="http://www.scmp.com/comment/insight-opinion/article/1200364/goal-yuan-convertibility-within-reach">HSBC’s Qu Hongbin have noted</a>, is readily available to businesses for such purposes.</p>
<p>Finally, we should also be clear about what the expected currency deal does not mean.</p>
<p>It does not mean that the renminbi will become convertible for Australian investors. China’s capital controls will remain, such as those that prevent Australian investors from using renminbi to freely purchase shares on China’s stock exchanges in Shanghai and Shenzhen.</p>
<p>It also does not necessarily mean that the RMB/$AUD rate will float freely. Chinese government intervention in the RMB/$USD market is well known, and there have also been reports that fluctuations in the RMB/Yen rate are <a href="http://www.aljazeera.com/news/asia-pacific/2012/06/2012617313664236.html">the subject of restrictions</a>.</p><img src="https://counter.theconversation.com/content/13221/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Laurenceson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Julia Gillard leaves Australia for China tomorrow, her second trip to the Middle Kingdom as Prime Minister. As befits China’s status as Australia’s most important trading partner, the trip has attracted…James Laurenceson, Senior Lecturer, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.