tag:theconversation.com,2011:/ca/topics/yuan-19413/articlesYuan – The Conversation2023-06-20T08:51:47Ztag:theconversation.com,2011:article/2070572023-06-20T08:51:47Z2023-06-20T08:51:47ZWhy US ‘dollar doomsayers’ could be wrong about its imminent demise<figure><img src="https://images.theconversation.com/files/531167/original/file-20230609-15-iblgu4.jpg?ixlib=rb-1.1.0&rect=107%2C83%2C7748%2C4371&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">phanurak rubpol/Shutterstock</span></span></figcaption></figure><p>The position of the US dollar in <a href="https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4">the global league table of foreign exchange reserves</a> held by other countries is closely watched. Every <a href="https://uk.style.yahoo.com/natural-way-diversify-janet-yellen-125500087.html#:%7E:text=Fed%20decides%20to%20pause%3A%20Impact%20on%20investors%2C%20markets&text=The%20U.S.%20dollar%20saw%20an,days%20of%20dominance%20are%20over.">slight fall in its share</a> is interpreted as confirmation of its imminent demise as <a href="https://www.cnbc.com/video/2023/06/08/expect-us-dollars-dominance-to-stay-for-foreseeable-future-moodys.html">the preferred global currency</a> for financial transactions. </p>
<p>The recent drama surrounding <a href="https://newrepublic.com/article/170703/debt-ceiling-dollar-reserve-currency">negotiations about raising the limit on US federal government debt</a> has only fuelled these predictions by “dollar doomsayers”, who believe <a href="https://www.investopedia.com/terms/d/debt-ceiling.asp#:%7E:text=Debt%20Ceiling%20Showdowns%20and%20Shutdowns">repeated crises over the US government’s borrowing limit</a> weakens the country’s perceived stability internationally. </p>
<p>But the real foundation of its dominance is global trade – and it would be very complicated to turn the tide of these many transactions away from the US dollar.</p>
<p>The international role of a global currency in financial markets is ultimately based on its use in non-financial transactions, especially as <a href="https://www.imf.org/en/Publications/WP/Issues/2020/07/17/Patterns-in-Invoicing-Currency-in-Global-Trade-49574">what’s called an “invoicing currency” in trade</a>. This is the currency in which a company charges its customers. </p>
<h2>Global network of supply and trade</h2>
<p>Modern trade can involve many financial transactions. Today’s supply chains often see goods shipped across several borders, and that’s after they are produced using a combination of intermediate inputs, usually from different countries. </p>
<p>Suppliers may also only get paid after delivery, meaning they have to finance production beforehand. Obtaining this financing in the currency in which they invoice makes trade easier and more cost effective. </p>
<p>In fact, it would be very inconvenient for all participants in a value chain if the invoicing and financing of each element of the chain happened in a different currency. Similarly, if most trade is invoiced and financed in one currency (the US dollar at present), even banks and firms outside the US have an incentive to denominate and settle financial transactions in that currency. </p>
<p>This status quo becomes difficult to change because no individual organisation along the chain has an incentive to switch currencies if others aren’t doing the same. </p>
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<a href="https://theconversation.com/five-ways-that-the-super-strong-us-dollar-could-hurt-the-world-economy-186654">Five ways that the super-strong US dollar could hurt the world economy</a>
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<p>This is why the US dollar is <a href="https://www.wto.org/english/res_e/reser_e/ersd201210_e.pdf">the most widely used currency in third-country transactions</a> – those that don’t even involve the US. In such situations it’s called a vehicle currency. The euro is used mainly in the vicinity of Europe, whereas the US dollar is widely used <a href="https://www.jstor.org/stable/23352320">in international trade among Asian countries</a>. Researchers call this <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20171201">the dominant currency paradigm</a>.</p>
<p>The convenience of using the US dollar, even outside its home country, is further buttressed by the openness and size of US financial markets. They make up <a href="https://www.msci.com/documents/10199/178e6643-6ae6-47b9-82be-e1fc565ededb">36% of the world’s total</a> or five times more than the euro area’s markets. Most trade-related financial transactions <a href="https://blogs.worldbank.org/trade/greasing-wheels-commerce-trade-finance-and-credit">involve the use of short-term credit</a>, like using a credit card to buy something. As a result, the banking systems of many countries must then be at least partially based on the dollar so they can provide this short-term credit. </p>
<p>And so, these banks need to invest in the US financial markets to refinance themselves in dollars. They can then provide this to their clients as dollar-based short-term loans.</p>
<p>It’s fair to say, then, that the US dollar has not become the premier global currency only because of US efforts to foster its use internationally. It will also continue to dominate as long as private organisations engaged in international trade and finance find it the most convenient currency to use.</p>
<h2>What could knock the US dollar off its perch?</h2>
<p>Some governments such as that of China might try to offer alternatives to the US dollar, but they are unlikely to succeed. </p>
<p>Government-to-government transactions, for example for crude oil between China and Saudi Arabia, could be denominated in yuan. But then the Saudi government would have to find something to do with the Chinese currency it receives. Some could be used to pay for imports from China, but <a href="https://oec.world/en/profile/country/sau/?yearlyTradeFlowSelector=flow0">Saudi Arabia imports</a> a lot less from China (about US$30 billion) than it exports (about US$49 billion) to the country.</p>
<p>The US$600 billion <a href="https://www.pif.gov.sa/en/Pages/AboutPIF.aspx">Public Investment Fund</a> (PIF), Saudi Arabia’s sovereign wealth fund, could of course use the yuan to invest in China. But this is difficult on a large scale because Chinese currency remains only partially “convertible”. This means that the Chinese authorities still control many transactions in and out of China, so that the PIF might not be able to use its yuan funds as and when it needs them. Even without convertibility restrictions, few private investors, and even fewer western investment funds, would be keen to put a lot of money into China if they are at the mercy of the Communist party.</p>
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Read more:
<a href="https://theconversation.com/war-in-ukraine-might-give-the-chinese-yuan-the-boost-it-needs-to-become-a-major-global-currency-and-be-a-serious-contender-against-the-us-dollar-205519">War in Ukraine might give the Chinese yuan the boost it needs to become a major global currency -- and be a serious contender against the US dollar</a>
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<p>China is of course the country with the strongest political motives to challenge the hegemony of the US dollar. A natural first step would be for China to diversify its foreign exchange reserves away from the US by investing in other countries. But this is easier said than done. </p>
<p>There are few opportunities to invest hundreds or thousands of billions of dollars outside of the US. <a href="https://stats.bis.org/statx/srs/table/c1?f=pdf">Figures from the Bank of International Settlements</a> show that the euro area bond market – a place for investors to finance loans to Euro area companies and governments – is worth less than one third of that of the US. </p>
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<img alt="Full-colour US dollar and Chinese yuan notes torn in half and pictured beside each other over a grey map of the world." src="https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/531169/original/file-20230609-5641-6c2xc8.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">
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<p>Also, in any big crisis, other major OECD economies like Europe and Japan are more likely to side with the US than China – making such a decision is even easier when they are using US dollars for trade. It was said that states <a href="https://www.piie.com/blogs/realtime-economics/much-global-south-ukraines-side">accounting for one half of the global population</a> refused to condemn Russia’s invasion of Ukraine, but this half does not account for a large share of global financial markets. </p>
<p>Similarly, it shouldn’t come as a surprise that democracies dominate the world financially. Companies and financial markets require trust and a well-established rule of law. Non-democratic regimes have no basis for establishing the rule of law and every investor is ultimately subject to the whims of the ruler.</p>
<p>When it comes to global trade, currency use is underpinned by a self-reinforcing network of transactions. Because of this, and the size of the US financial market, the dollar’s dominant position remains something for the US to lose rather for others to gain.</p><img src="https://counter.theconversation.com/content/207057/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniel Gros 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>So much international trade happens in dollars that it would be very difficult to turn the tide against the currency any time soon.Daniel Gros, Professor of Practice and Director of the Institute for European Policymaking, Bocconi UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055192023-06-01T12:30:26Z2023-06-01T12:30:26ZWar in Ukraine might give the Chinese yuan the boost it needs to become a major global currency – and be a serious contender against the US dollar<figure><img src="https://images.theconversation.com/files/528317/original/file-20230525-29-2upko8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">China and the U.S. compete to be the world's largest economy, but the dollar dominates the yuan as a currency.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/sino-us-trade-war-royalty-free-image/1216692156">peng song/Moment Collection/Getty Images</a></span></figcaption></figure><p>The Chinese economy’s sheer size and rapid growth are impressive.</p>
<p>China maintained one of the <a href="https://www.worldbank.org/en/country/china/overview#1">highest economic growth rates</a> in the world for more than a quarter of a century, helping lift <a href="https://www.worldbank.org/en/news/press-release/2022/04/01/lifting-800-million-people-out-of-poverty-new-report-looks-at-lessons-from-china-s-experience">over 800 million people</a> out of poverty in just a few decades. The country is the <a href="https://wits.worldbank.org/CountrySnapshot/en/CHN">largest exporter in the world</a> and the most important trading partner of Japan, Germany, Brazil and many other countries. It has the <a href="https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD">second-largest economy</a> after the U.S., based on the market exchange rate, and the largest <a href="https://databankfiles.worldbank.org/public/ddpext_download/GDP_PPP.pdf">based on purchasing power</a>.</p>
<p>And yet the yuan still lags as a major global currency. The war in Ukraine, which started in February 2022, may change that. </p>
<p>As a <a href="https://www.loyola.edu/sellinger-business/faculty-research/directory/chuluun">professor of finance</a> and <a href="https://www.mheducation.com/highered/product/international-financial-management-eun-resnick/1264413092.html">expert on international finance</a>, I understand how this geopolitical conflict may put China’s currency on the next phase of its path to becoming a global currency – and prompt the onset of the decline of the U.S. dollar from <a href="https://www.bis.org/statistics/rpfx22_fx.htm">its current dominance</a>. </p>
<h2>Chinese yuan’s slow progress</h2>
<p>China has long wanted to make the yuan a global force and has mounted significant efforts to do so in recent years. </p>
<p>For example, the Chinese government <a href="https://www.reuters.com/article/uk-china-economy-yuan/china-launches-yuan-cross-border-interbank-payment-system-idUKKCN0S204320151008">launched the Cross-Border Interbank Payments System</a>, or CIPS, in 2015 to facilitate cross-border payments in yuan. Three years later, in 2018, it launched the world’s <a href="http://www.xinhuanet.com/english/2018-03/26/c_137065815.htm">first yuan-denominated crude oil futures contracts</a> to allow exporters to sell oil in yuan. </p>
<p>China has also emerged perhaps as the <a href="https://hbr.org/2020/02/how-much-money-does-the-world-owe-china">world’s largest creditor</a>, with the government and state-controlled enterprises extending loans to dozens of developing countries. And China is <a href="https://www.cnn.com/2023/04/24/economy/china-digital-yuan-government-salary-intl-hnk/index.html">developing a digital yuan</a> as one of the world’s first central bank digital currencies. Even the trading hours for the yuan were <a href="https://www.reuters.com/article/china-yuan-trading/update-1-china-to-extend-fx-market-trading-hours-to-further-internationalise-yuan-idINL1N33K0GJ">recently extended</a> on the mainland.</p>
<p>Thanks to these efforts, the yuan is now the <a href="https://www.bis.org/statistics/rpfx22_fx.htm">fifth-most-traded currency</a> in the world. That is a phenomenal rise from its <a href="https://www.bis.org/publ/rpfx02.htm">35th place in 2001</a>. The yuan is also the <a href="https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/rmb-tracker-document-centre">fifth-most-actively used currency</a> for global payments as of April 2023, up from 30th place in early 2011. </p>
<p>Rankings can be misleading, though. The yuan’s average trading volume is still <a href="https://www.bis.org/statistics/rpfx22_fx.htm">less than a 10th</a> of the U.S. dollar’s. Moreover, almost all trading was against the U.S. dollar, with little trading against other currencies.</p>
<p>And when it comes to global payments, the actual share of the yuan is a <a href="https://www.swift.com/our-solutions/compliance-and-shared-services/business-intelligence/renminbi/rmb-tracker/rmb-tracker-document-centre">mere 2.3%</a>, compared with 42.7% for the dollar and 31.7% for the euro. The yuan also constituted <a href="https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4">less than 3%</a> of the world foreign exchange reserves at the end of 2022, compared with 58% for the dollar and 20% for the euro.</p>
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<img alt="Two men shake hands in front of Russian and Chinese flags" src="https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=425&fit=crop&dpr=1 600w, https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=425&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=425&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=534&fit=crop&dpr=1 754w, https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=534&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/528318/original/file-20230525-27-sg2yw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=534&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Russian Prime Minister Mikhail Mishustin meets with Chinese President Xi Jinping in Beijing on May 24, 2023, with the two countries signing a new set of trade agreements.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/russian-prime-minister-mikhail-mishustin-meets-with-chinas-news-photo/1257684729">Alexander Astafyev/Sputnik/AFP</a></span>
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<h2>US dollar’s dominance questioned</h2>
<p>The U.S. dollar has reigned supreme as the dominant global currency for decades – and concern about how that benefits the U.S. and potentially hurts emerging markets <a href="https://scholar.harvard.edu/gopinath/publications/dominant-currency-paradigm-0">is not new</a>. </p>
<p>The value of the <a href="https://www.reuters.com/markets/currencies/recession-worries-could-support-dollar-after-monstrous-2022-rally-2022-12-08/">U.S. dollar appreciated significantly</a> against most other currencies in 2022 as the Federal Reserve hiked interest rates. This had negative consequences for residents of almost any country that borrows in dollars, pays for imports in dollars, or buys wheat, oil or other commodities priced in dollars, as these transactions became more expensive. </p>
<p>After Russia invaded Ukraine in early 2022, the U.S. and its Western allies put sanctions on Russia, <a href="https://www.swift.com/news-events/news/message-swift-community">including cutting Russia’s access</a> to the global dollar-based payments system known as the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. That clearly displayed how the dollar can be weaponized. </p>
<p>With Russia largely cut off from international financial markets, it stepped up its trade with China. Russia began <a href="https://www.cnn.com/2022/09/06/energy/china-russian-gas-payments-ruble-yuan/index.html">receiving payments for coal and gas in yuan</a>, and Moscow <a href="https://www.reuters.com/markets/currencies/permitted-share-chinas-yuan-russian-wealth-fund-doubled-60-finmin-2022-12-30/">increased the yuan holdings</a> in its foreign currency reserves. Russian companies like Rosneft <a href="https://www.rosneft.com/press/releases/item/212071/">issued bonds denominated in yuan</a>. According to Bloomberg, the yuan is now the <a href="https://www.bloomberg.com/news/articles/2023-04-03/china-s-yuan-replaces-dollar-as-most-traded-currency-in-russia">most-traded currency in Russia</a>.</p>
<p>Other countries took notice of Russia’s increasing use of the yuan and saw an opportunity to decrease their own dependency on the dollar.</p>
<p><a href="https://www.reuters.com/business/energy/bangladesh-pay-russia-yuan-nuclear-plant-2023-04-17/">Bangladesh is now paying Russia in yuan</a> for the construction of a nuclear power station. <a href="https://www.nasdaq.com/articles/china-completes-first-yuan-settled-lng-trade">France is accepting payment in yuan for liquefied natural gas</a> bought from China’s state-owned oil company. A Brazilian bank controlled by a Chinese state bank is becoming the first Latin American bank to <a href="https://www.bloomberg.com/news/articles/2023-03-30/brazil-takes-steps-to-transact-in-yuan-as-ties-with-china-grow#xj4y7vzkg">participate directly in China’s payments system, CIPS</a>. <a href="https://www.bloomberg.com/news/articles/2023-02-22/iraq-pivots-to-yuan-for-china-imports-in-defense-of-own-currency#xj4y7vzkg">Iraq wants to pay for imports from China in yuan</a>, and even Tesco, the British retailer, <a href="https://www.economist.com/leaders/2013/02/09/yuan-for-the-money">wants to pay for its Chinese imported goods in yuan</a>. </p>
<p>The combined dollar amount of these transactions is still relatively small, but the shift to yuan is significant.</p>
<h2>Yuan still not freely available</h2>
<p>China keeps <a href="https://www.safe.gov.cn/en/2023/0222/2067.html">a tight grip</a> on money coming in and out of the country. Such capital controls and limited transparency in Chinese financial markets mean China still lacks the deep and free financial markets that are required to make the yuan a major global currency. </p>
<p>For the yuan to achieve a truly global standing, it needs to be freely available for cross-border investment and not just serve as a payment medium to accommodate trade. </p>
<p>But the war in Ukraine may have just made it feasible for the yuan to eventually join the ranks of the dollar and the euro – even if the volume isn’t there yet. And any U.S. policy decisions that weaken the reputation and strength of U.S. institutions – such as <a href="https://theconversation.com/voters-want-compromise-in-congress-so-why-the-brinkmanship-over-the-debt-ceiling-206465">the recent drama over raising the debt ceiling</a>, which brought the government to the brink of default – will accelerate the rise of the yuan and decline of the dollar.</p><img src="https://counter.theconversation.com/content/205519/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tuugi Chuluun does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite China’s economic power, the yuan lags as a major global currency. Here’s why current US interest rates and sanctions on Russia may change that.Tuugi Chuluun, Associate Professor of Finance, Loyola University MarylandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2022012023-05-31T14:07:29Z2023-05-31T14:07:29ZMeet the EU’s answer to crypto: the e-euro<figure><img src="https://images.theconversation.com/files/527991/original/file-20230524-23-hmxtn.jpg?ixlib=rb-1.1.0&rect=0%2C34%2C5710%2C3607&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">EU consumers are familiar making payments with traditional coins and bills, but soon they could be joined by an 'e-euro".</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/Y_x747Yshlw">Christian Dubovan/Unsplash</a></span></figcaption></figure><p>In a bid to play catch up with technology companies and younger generations of consumers, central banks are finally starting to take digital currencies seriously. Countries such as Sweden, China, and India have establish pilot digital currencies – respectively, the e-krona, e-yuan and e-rupee – via their central banks. In the finance sector, these are known as central bank digital currencies (CBDCs).</p>
<p>The purpose, scale and status of such efforts vary considerably. In Sweden, the goal is to investigate the <a href="https://www.riksbank.se/en-gb/payments--cash/e-krona/">potential transition</a> from banknotes to a digital currency, and the e-krona remains in the starting blocks. In China, the “digital renminbi” started to roll out in 2020, and its goal is to allow the state to <a href="https://library.fes.de/pdf-files/international/20024-20230214.pdf">better control the retail economy</a>. India launched an e-rupee pilot in 2022 and its purpose is to <a href="https://economictimes.indiatimes.com/small-biz/money/indias-e-rupee-is-here-what-to-expect-from-the-retail-cbdc-pilot/articleshow/98404352.cms?from=mdr">facilitate a broad range of transactions</a>. Meanwhile, the United States is exploring the <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/16/fact-sheet-white-house-releases-first-ever-comprehensive-framework-for-responsible-development-of-digital-assets/">potential repercussions</a> of establishing its own digital currency. </p>
<p>Along the same lines, the European Union is currently toying with the idea of launching its own digital currency, the <a href="https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html">e-euro</a>. As the European Central Bank (ECB) explains, it would provide a digital alternative to existing payment methods with the goal of increasing the security and stability of the EU’s monetary system. The e-euro would be held in digital wallets, with transactions facilitated by the use of blockchain. </p>
<p>A crucial difference between the e-euro (a CBDC) and cryptocurrencies is that its overall quantity – the number in circulation – would not be capped. Because bitcoins and other cryptocurrencies aren’t issued by central banks, the number in circulation is limited by the fact that creating new ones requires “mining”, an energy-intensive process that involves solving extremely complicated math problems. Not the case with the e-euro, as it would be regulated by the European Central Bank and be linked directly to the euro itself – there will be no exchange rate, it would simply be the euro in another format. </p>
<p>While there is a superficial similarity between the e-euro and <a href="https://www.investopedia.com/terms/s/stablecoin.asp">“stablecoins”</a> – cryptocurrencies whose value is pegged to a major currency – the e-euro would be issued and controlled from a public entity. This will ensure stability in valuations and regulation.</p>
<h2>The case in favour</h2>
<p>The 1 million euro question is why is the ECB would consider a digital currency. While we all have a centuries-long familiarity with physical currencies, digital ones have some advantages:</p>
<ul>
<li><p><em>Less resource intensive</em>. A central bank digital currency doesn’t require printing, validation, circulation, monitoring and replacement, and thus would have a considerably lower ecological footprint. That it will be issued rather than <a href="https://www.cnet.com/personal-finance/crypto/bitcoin-mining-how-much-electricity-it-takes-and-why-people-are-worried/">mined</a> adds to its energy efficiency. The International Monetary Fund estimates that a CBDC’s payment system for clearance and settlement could use <a href="https://www.imf.org/wp-content/uploads/2022/06/CBDCs-Chart.jpg">hundreds of thousand of times less energy</a> than physical currencies and cryptocurrencies while maintaining <a href="https://bpi.com/central-bank-digital-currencies-costs-benefits-and-major-implications-for-the-u-s-economic-system/">low transaction costs</a>.</p></li>
<li><p><em>Increased banking access</em>. Because a digital euro would be directly managed by central banks, it would eliminate the need for intermediaries such as private financial institutions. It thus has the potential to reduce economic exclusion, such as in the cases of <a href="https://www.theguardian.com/money/2020/jun/24/you-cant-pay-cash-here-how-cashless-society-harms-most-vulnerable">“the unbanked”</a> – low-income people without bank accounts. The ECB would create and sustain the required infrastructure, making the e-euro available to all. For example, while private institutions would require a minimum credibility score to open an account, governments could facilitate access to money by opening digital wallets as part of a social policy agenda. </p></li>
<li><p><em>Economic sovereignty</em>. It can protect the euro from competing CBDC and <a href="https://d-nb.info/124947843X/34">other cryptocurrencies</a> and thus defend Europe’s <a href="https://www.ecb.europa.eu/pub/pdf/other/key_objectives_digital_euro%7Ef11592d6fb.en.pdf">economic sovereignty</a>. It will also allow governments to monitor transactions and so reduce <a href="https://watermark.silverchair.com/fjab009.pdf">tax avoidance and money laundering</a> .</p></li>
</ul>
<h2>Where a digital currency leaves central and commercial banks</h2>
<p>Given the potential advantages of central bank digital currencies, what is holding countries back? Everything depends on how CBDCs are be designed and implemented, and some challenges that might overshadow any potential.</p>
<ul>
<li><p><em>Pushing back against private digital currencies</em>. Imagine a world where private digital currencies like bitcoin or Facebook’s libra become the means for a substantial share of world’s financial transactions. In this world, the value of the means of exchange would be entirely determined by supply and demand or by the private venture – for example, Facebook itself. The introduction of CBDCs would enable central banks to determine the value of money itself and thus help ensure their country’s monetary sovereignty. People will still be able to choose between national currencies or those supported by private firms, but with the e-euro, Europe will at least be on an equal footing.</p></li>
<li><p><em>Balancing security and privacy</em> The basic principle of tangible money is anonymity. In its cash format, money can be exchanged for goods or services without necessarily disclosing one’s identity with every transaction. A fully secure digital currency would require that all transaction information be reported to the authorities, while a fully private one disclose no information. The former would give too much power to central authorities, while the latter would encourage tax avoidance and other nefarious behaviour. The traceability of blockchain can assist in tracking back the full financial history, but should the identity of the actor be public information? The e-euro is likely to operate in a semi-anonymous format to preserve a balance between security and privacy.</p></li>
<li><p><em>More stability, less speculation</em>. The initial idea of digital currencies was that they would become decentralized means of exchange, governed by the forces of supply and demand. However, they shortly became speculative assets, subject to <a href="https://www.theguardian.com/technology/2022/aug/29/crypto-crash-how-a-teachers-dream-investment-turned-into-a-nightmare-loss">vertiginous spikes and brutal crashes</a>. Instead, a major currency should reflect the conditions of the real economy rather than speculation about its future state.</p></li>
</ul>
<p>So is the e-euro something that we need or want? This depends on how it will be designed and regulated. For this particular venture, given the complexity of EU regulation, the devil is in the details.</p><img src="https://counter.theconversation.com/content/202201/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Iordanis Kalaitzoglou ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Central banks are now taking digital currencies seriously, and the EU is exploring the idea. While an “e-euro” could increase monetary security and stability, the venture is not without risks.Iordanis Kalaitzoglou, Ascociate Professor in Finance, AudenciaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1800072022-03-25T16:20:24Z2022-03-25T16:20:24ZPutin’s roubles-for-gas demand is no serious threat to US dollar reserve status – here’s why<p><a href="https://www.reuters.com/business/energy/putin-says-russia-will-start-selling-gas-unfriendly-countries-roubles-2022-03-23/">President Vladimir Putin’s demand</a> that “unfriendly countries” henceforth pay for Russian gas in roubles has had several immediate effects. With the Europeans given one week to switch to paying in the Russian currency, it has driven up the price of natural gas, making it more expensive for them to maintain the sanctions regime. </p>
<p>The rouble has strengthened against the US dollar since the announcement from ₽107 to ₽99. And if European nations accede to Russia’s terms, the demand for roubles will increase and accordingly further strengthen the currency’s value in the foreign exchange market. </p>
<p>The moves put pressure on European countries to backslide on enforcing financial sanctions, since using roubles would presumably force them to buy the currency from sanctioned Russian banks. And it can be seen as a ploy to split Germany and Italy off from the sanctions alliance, since they are particularly dependent on Russian gas. </p>
<p>The early indications are that divide and rule may not be working: the Germans have announced they will <a href="https://www.ft.com/content/de704c90-dc68-4747-86ef-551f1ffbcb04">reduce their dependency</a> on Russian gas to as little as 10% (compared to over 50% today) by summer 2024. But since Russia is implicitly threatening to cut off Europe’s gas supply immediately unless it starts paying in roubles, the more pressing question is what the ramifications look like today. </p>
<p><strong>Natural gas price (UK spot, pence/therm)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="UK natural gas price chart" src="https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=394&fit=crop&dpr=1 754w, https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=394&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/454361/original/file-20220325-17-1j05spu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=394&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://tradingeconomics.com/commodity/natural-gas">Trading Economics</a></span>
</figcaption>
</figure>
<p>It is not clear that Russia can legally change the terms of existing long-term gas-supply contracts with a unilateral announcement. The existing contracts already stipulate the currency in which payment is to be settled (<a href="https://www.reuters.com/business/energy/putin-says-russia-will-start-selling-gas-unfriendly-countries-roubles-2022-03-23/">currently Gazprom</a>, which dominates Russian supply to Europe, settles 58% of its European gas sales in euros, 39% in US dollars, and 3% in pounds sterling). Accordingly, German economy minister Robert Habeck has said that the roubles-for-gas demand amounts to <a href="https://www.reuters.com/article/germany-russia-rouble-idAFS8N2UJ073">breach of contract</a>.</p>
<p>If European countries choose to argue this change, there are legal avenues for resolving the dispute as stipulated in each contract (the legal jurisdiction, and the court or dispute resolution arrangements). The trouble is that none may be viable in practice. </p>
<p>Between 2005 and 2010 a series of gas disputes between Russia and Ukraine were ultimately resolved by the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) in Sweden. But given that Russia has included all EU member states on its list of <a href="http://government.ru/docs/44745/">48 “unfriendly states”</a>, it is questionable whether it would accept Swedish SCC arbitration as independent now. The same goes for the UK and Switzerland, which are also world centres for arbitration and dispute resolution. Hence the dispute is probably not going to be resolved via legal argument. </p>
<h2>The threat to the dollar</h2>
<p>This latest demand from Russia is unprecedented. Even during the cold war, the Soviet Union <a href="https://www.economist.com/europe/2022/01/29/how-will-europe-cope-if-russia-cuts-off-its-gas">did nothing</a> to interrupt gas supplies to Europe. Perhaps this is why Putin added that this demand only concerns the currency of payment, and that contractual volumes and prices will continue to be honoured.</p>
<p>The demand can be seen as an extension of Russia’s attempt (along with China) to <a href="https://www.bnnbloomberg.ca/russia-ditches-the-dollar-for-bulk-of-its-exports-to-china-1.1479397">“de-dollarise” its economy</a>, which has been ongoing since western countries introduced sanctions on Russia over Crimea in 2014. <a href="https://www.cnbctv18.com/world/russia-to-de-dollarise-economy-eyes-crypto-what-could-this-mean-11180762.htm">This has included</a> increasingly trading with countries such as India and China in either euros or local currencies; reducing central bank holdings of US dollar reserves; and cutting dollar assets out of its national sovereign wealth fund. China has <a href="https://theconversation.com/swift-ejecting-russia-is-largely-symbolic-heres-why-178065">meanwhile developed</a> an international payments messaging system called CIPS, which is a way of avoiding using the western Swift system. </p>
<p>China and Russia are uncomfortable with the prevailing <a href="https://www.cfr.org/backgrounder/dollar-worlds-currency">reserve-currency status</a> of the US dollar, which means it is the main currency used in international trade and held by central banks. Important commodities such as oil, and global services such as air transport, are priced in the American currency. It also makes it cheaper for the US to borrow on international financial markets, giving it an advantage over other countries. </p>
<p>Crucially, the US can impose economic sanctions on almost all trade settled in dollars. They do this by ordering so-called correspondent banks that hold accounts at the Federal Reserve not to transact with, say, their Russian counterparts. This cuts off one of the main ways of obtaining the US dollars necessary to participate in international trade. </p>
<p>Another issue is that it is easy and relatively cheap for countries around the world to borrow in dollars, but if the value of the dollar relative to other countries rises, the borrower’s debts become worth more in their own currency. The dollar is liable to rise when, for example, the Federal Reserve decides to put up interest rates, so countries with dollar-denominated debts are at the mercy of US monetary policy. </p>
<p>Russia’s de-dollarisation push has not been entirely unsuccessful. The share of its trade denominated in euros rose <a href="https://www.russia-briefing.com/news/russian-settles-majority-of-trade-debt-with-china-in-euros-for-first-time.html/">above 50%</a> for the first time in the first quarter of 2020. The Europeans themselves have not been against trading more with the Russians in euros: the fact that Gazprom’s European supply contract is majority-denominated in euros can be credited to Putin’s de-dollarisation drive. This has helped to achieve a <a href="https://www.bnnbloomberg.ca/russia-ditches-the-dollar-for-bulk-of-its-exports-to-china-1.1479397">modest increase</a> in Russia’s share of euro-denominated trade with the EU overall. </p>
<p>Meanwhile, the Saudis have <a href="https://www.bloomberg.com/news/articles/2022-03-15/yuan-surges-after-report-on-saudis-accepting-currency-for-oil">been negotiating</a> with the Chinese about potentially pricing their oil trading in yuan instead of dollars. As Saudi’s largest oil customer, that would take another bite out of the dollar’s importance as the reserve currency. </p>
<p>Having said all that, <a href="https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.htm#:%7E:text=The%20most%20recent%20Triennial%20Central,20%20years%20(Figure%209).">the big picture</a> is that de-dollarisation by Russia and China has had only a modest effect on the US dollar’s dominant position. The dollar continues to be used in nearly nine in every ten forex transactions. It makes up the vast majority of all global export invoicing, and nearly three-fifths of all central bank reserves across the world. </p>
<p>So while Russia’s latest move is certainly part of a wider strategy that has had some success, we are nowhere near a tipping point. Even if the Europeans end up buying Russian gas in roubles for a while, that is not going to fundamentally change how the world economy works.</p><img src="https://counter.theconversation.com/content/180007/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kim Kaivanto 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>It will take more than Europe’s gas requirement to topple the greenback.Kim Kaivanto, Senior Lecturer in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1796022022-03-22T16:54:31Z2022-03-22T16:54:31ZRussia sanctions: new impetus for Chinese yuan to move up the reserve currency ladder?<figure><img src="https://images.theconversation.com/files/453080/original/file-20220318-21-19ht7h5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">gettyimages </span> <span class="attribution"><span class="source">Getty images</span></span></figcaption></figure><p>The invasion of Ukraine by the Russian forces has led to the most aggressive <a href="https://www.piie.com/blogs/realtime-economic-issues-watch/russias-war-ukraine-sanctions-timeline">financial sanctions</a> by Western countries against another country in modern history. </p>
<p>Two financial sanctions stand out in particular. Firstly, the decision to <a href="https://sanctionsnews.bakermckenzie.com/new-eu-sanctions-cut-off-certain-russian-banks-from-swift-and-prohibit-certain-investments-in-russia/">block the majority of Russian banks</a> from <a href="https://www.swift.com/">SWIFT</a>, the global messaging system that enables them to transfer money across the world. This measure is backed by the major world economies such as the European Commission, France, Canada, Germany, Italy, Japan, the UK and the US. </p>
<p>Secondly, these countries also agreed to <a href="https://www.reuters.com/business/us-blocks-any-us-transactions-with-russian-central-bank-others-2022-02-28/">prevent the Russian Central Bank </a> from using its international reserves held by these countries to undermine sanctions.</p>
<p>The aggressive sanction response from Western nations will most definitely influence the Central Bank of Russia’s decisions in the management of its currency reserves. And here the neutral role of China will be pivotal. </p>
<p>A telling factor is that <a href="https://www.reuters.com/business/aerospace-defense/russian-advance-stalls-us-warns-china-against-aiding-moscow-ukraine-2022-03-17/">China</a>, the second largest economy globally, did not join in introducing sanctions against Russia. China also <a href="https://theguardian.com/world/2022/mar/02/united-nations-russia-ukraine-vote/">abstained</a> during the UN General Assembly vote and followed a toned-down condemnation approach by stating that sanctions are not the solution to the problem.</p>
<p>The US, UK, Japan and countries in the EU and their respective currencies are the dominant players on the world financial markets. The US dollar and the Euro <a href="https://www.statista.com/statistics/1189498/share-of-global-payments-by-currency/">dominate SWIFT payments</a> – in 2021 they made up 77.2% of them. </p>
<p>But earlier this year Bloomberg noted that the Chinese yuan (also known as renminbi) reached <a href="https://www.statista.com/statistics/1189498/share-of-global-payments-by-currency/">fourth position </a> in the international payments market. This is a remarkable improvement. In 2010 the yuan <a href="https://www.dailymaverick.co.za/article/2022-01-20-yuans-popularity-for-global-payments-hits-highest-in-six-years/">ranked 35th</a> when SWIFT started its tracking of international transactions.</p>
<p>That was the year that the yuan entered the international financial transaction market. Six years later the currency <a href="https://www.aljazeera.com/economy/2015/12/1/imf-approves-chinas-yuan-as-reserve-currency">received IMF approval</a> as a reserve currency.</p>
<p>China has great power aspirations on a wide front. A decade ago it indicated that it was aspiring to make the yuan the dominant currency in trade, financial transactions and especially <a href="https://www.brookings.edu/essay/the-long-game-chinas-grand-strategy-to-displace-american-order/">as a global reserve currency</a></p>
<p>The country has expanded access to more foreign financial institutions through the <a href="https://www.chathamhouse.org/2021/09/what-chinas-belt-and-road-initiative-bri/">Belt and Road Initiative</a> and the expansion of offshore yuan transaction centres. This, in turn, has boosted the yuan’s role in trade and financial transaction as well as its role as a reserve currency. </p>
<p>Geo-political considerations in the past such as Brexit and the US/China trade tensions under US President Donald Trump affected reserve management positions. These events contributed to global trade tensions and may have started the gradual shift away from the US dollar and Euro as reserve currencies. </p>
<p>The Russian/Ukraine conflict, which has contributed substantially to renewed geo-political tensions, is expected to have an even more pronounced influence. </p>
<p>But does the Chinese yuan have the potential to crowd-out the dollar as the eminent global reserve currency? </p>
<p>The recent global uncertainty and divisions created by the Ukraine crisis may give further momentum to this process.</p>
<h2>On the rise</h2>
<p>More than half – 55% – <a href="https://data.imf.org/cofer">of all central bank currency reserves</a> are still held in US dollars and <a href="https://data.imf.org/cofer">19% in Euros</a>. But a clear shift has gradually been taking place. The most notable has been the decline of the US dollar as reserve currency, down from 69% in 2007. </p>
<p>The yuan now holds the fifth position in the Currency Composition of Official Foreign Exchange Reserves after the US dollar, the Euro, the Japanese Yen and Pound Sterling. </p>
<p><a href="https://data.imf.org/cofer">The yuan’s share</a> is a mere 2.5% of official foreign exchange reserves. But <a href="https://www.globaltimes.cn/page/202107/1227563.shtml">its share has increased </a>, dramatically so since 2016. </p>
<p>In addition, it’s held as a reserve currency by an estimated 75 countries around the world.</p>
<p>The increase of China’s role in world trade is an important factor determining whether countries are increasing their reserve holdings in yuan. In 2017 the European Central Bank <a href="https://www.ecb.europa.eu/press/pr/date/2017/html/ecb.pr170613.en.html">added the yuan as a prominent reserve currency</a> when China became one of Europe’s biggest trading partners. </p>
<p>The same applies for countries in Asia and <a href="https://www.un.org/africarenewal/magazine/august-2014/chinese-yuan-penetrates-african-markets">Africa</a>. </p>
<p>All these factors could influence its standing as a more prominent future reserve currency.</p>
<p>The fallout from Russia’s invasion of Ukraine could provide added impetus to this.</p>
<h2>The ripple effect of sanctions</h2>
<p>Russia has built up its reserves dramatically. It now holds total reserves of <a href="https://www.statista.com/chart/26942/gold-foreign-exchange-reserves-of-central-bank-of-russia/">US$ 630 billion</a>. Unconfirmed 2021 estimates indicate that Russia holds <a href="https://newsonair.com/2021/07/24/india-becomes-4th-largest-forex-reserves-holder-globally-forex-touches-record-high-of-612-billion/">the number five spot</a> in the world and is surpassed only by reserve holdings by China, Japan, Switzerland and India. </p>
<p><a href="https://www.statista.com/chart/26940/russian-central-bank-foreign-currency-and-gold-reserves-by-holder/">According to the Central Bank of Russia (June 30, 2021)</a> China is the single largest foreign holder of Russia’s foreign currency reserves. The country holds 13.8% of Russia’s total reserves, of which 13.1% of the total reserve holdings of US$ 630 billion are denominated in yuan. 21.7% of reserves are held in gold reserves. </p>
<p>Russia’s remaining currency reserves of 65% are held by France, Japan, Germany, the US, UK and international institutions. This means that Russia will now only have access to an estimated 35% of its reserves under the financial sanction dispensation. </p>
<p>Russia may consider channelling some of these reserves through China
to access much needed goods and services. </p>
<p>But will China embrace the roll?</p>
<p>Russia and China have a close relationship. In 2019 Chinese President Xi Jinping <a href="https://www.bbc.com/news/world-europe-48537663">was quoted as saying</a> that he and Russian President Vladimir Putin have met nearly 30 times. And just less than a month before the invasion the two heads of state signed an agreement before the start of the Beijing Winter Olympics. The two leaders agreed <a href="https://www.wsj.com/articles/russias-vladimir-putin-meets-with-chinese-leader-xi-jinping-in-beijing-11643966743">to close and extensive cooperation</a> on economic, political and security fronts.</p>
<h2>The changes that need to happen</h2>
<p>Before the yuan can expand its role as eminent reserve currency China would have to comply with some regulatory requirements. Most importantly, the People’s Bank of China would need to relax its managed peg to the US dollar and other prominent global currencies. </p>
<p>Another key ingredient is the requirement of greater transparency and stability in monetary policies and the regulation of financial markets.</p>
<p>As the world becomes more divided by this war, the Chinese yuan may become the safe haven for Russia and other liked-minded countries. It may be just the stimulus that China hoped for.</p><img src="https://counter.theconversation.com/content/179602/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elsabe Loots 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>As the world becomes more divided by this war, the Chinese yuan may become the safe haven for Russia and other liked-minded countries.Elsabe Loots, Professor in Economics and former Dean of the Faculty of Economic and Management Sciences, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1474932020-10-14T03:59:20Z2020-10-14T03:59:20ZIndonesia and China inked a deal to promote the use of the Yuan and Rupiah. The political and economic implications are huge<figure><img src="https://images.theconversation.com/files/362916/original/file-20201012-17-1en9srd.jpg?ixlib=rb-1.1.0&rect=4%2C4%2C2991%2C1985&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A man looks at foreign currency exchange rates on an electronic panel in Jakarta, Indonesia</span> <span class="attribution"><span class="source">FOTO ANTARA/Rosa Panggabean/ed/mes/11</span></span></figcaption></figure><p>Last month, China and Indonesia <a href="http://www.xinhuanet.com/english/2020-09/30/c_139410036.htm">signed</a> an agreement to promote the use of local currencies — Chinese Yuan (RMB) and Indonesian Rupiah (Rp) — in trade and investment transactions between the two countries.</p>
<p>Yuan has actually penetrated Indonesia since China’s massive infrastructure project, the Belt and Road Initiatives (BRI), began in 2012. It is <a href="https://money.kompas.com/read/2019/07/25/143300726/10-persen-perdagangan-indonesia-telah-gunakan-mata-uang-yuan-china">reported</a> that currently, around 10% of Indonesia’s global trade uses Yuan. In 2018, the value of Yuan reached 201.2 billion RMB (US$29 billion) or about 63% of the entire Indonesian market. </p>
<p>The agreement marks a key milestone in strengthening bilateral financial cooperation between the world’s largest exporter, China, and Southeast Asia’s largest economy, Indonesia.</p>
<p>The agreement would also affect the political relationship between the two countries. </p>
<h2>Economic implications</h2>
<p>The recent agreement would reduce China and Indonesia’s dependence on the US Dollar as the world’s main currency in their international transactions.</p>
<p>For China, throwing away the US dollar <a href="https://www.cnbc.com/2019/10/31/de-dollarization-russia-china-eu-are-motivated-to-shift-from-using-usd.html">means</a> avoiding the prospect of being subject to US jurisdiction.</p>
<p>This could also help China secure <a href="https://www.globaltimes.cn/content/1153147.shtml">one of its major goals</a>: to dominate international trade as the world’s largest producer. </p>
<p>Meanwhile, Indonesia’s central bank hopes the agreement would help the country’s reduce its risk against fluctuation in the US dollar.</p>
<p>The US dollar <a href="https://republika.co.id/berita/ekonomi/keuangan/17/12/11/p0sphk383-94-persen-transaksi-perdagangan-indonesia-pakai-dolar-as">accounts for</a> about 90% of Indonesia’s foreign transactions. </p>
<p>The use of local currencies could help Indonesia maintain financial stability amid global financial market uncertainty caused by the pandemic and the US-China trade war.</p>
<p>The financial dispute between the US and China <a href="https://www.nytimes.com/2019/06/18/business/economy/global-economy-trade-war.html">has weakened</a> global economic growth because reduced trade activity has increased global uncertainty, especially for an emerging market such as Indonesia. </p>
<p>Responding to its dispute with China, the US’ Fed increased the very rates that make the US dollar attractive, forcing investors to pull money from the Indonesian market. That led to depreciation in the Rupiah. Rupiah <a href="https://www.cnbc.com/2018/09/03/indonesia-rupiah-falls-to-weakest-level-in-more-than-20-years.html">experienced</a> the biggest drop in 20 years, to Rp 14,777 against the US dollar.</p>
<p>During the COVID-19 pandemic, the Rupiah <a href="https://www.cnbcindonesia.com/market/20200912111947-17-186291/kisah-rupiah-terkapar-lawan-dolar-as-gara-gara-psbb-total">declined</a> again to Rp 15,000 against the greenback.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/363316/original/file-20201014-20-ucccpd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Indonesia’s currency Rupiah with the US dollar in the background.</span>
<span class="attribution"><span class="source">ANTARA FOTO/Puspa Perwitasari/kye/18</span></span>
</figcaption>
</figure>
<p>Meanwhile, the Rupiah exchange rate against Yuan remains stable at between Rp 1,900 and Rp 2,100 against Yuan. Therefore, transactions using Yuan would be cheaper. </p>
<p>The agreement is also crucial for Indonesia because Indonesia’s international trade with China — and the flow of Chinese foreign investment to Indonesia from Asian countries in general — has increased significantly. </p>
<p>Before the pandemic, China <a href="https://www.bps.go.id/pressrelease/2020/01/15/1734/ekspor-desember-2019-mencapai-us-14-47-miliar--sedangkan-nilai-impor-mencapai-us-14-50-miliar.html">was</a> the largest trading partner for Indonesia’s non-oil and gas products. </p>
<p>In 2019, China was <a href="https://jakartaglobe.id/business/indonesia-posts-largest-trade-surplus-since-2011-as-coronavirus-disrupts-imports-from-china/">Indonesia’s biggest export destination country</a>, with a value of US$ 25.8 million — around 16.68% of total exports. In the same year, China was <a href="https://jakartaglobe.id/business/indonesia-posts-largest-trade-surplus-since-2011-as-coronavirus-disrupts-imports-from-china/">the largest importer for Indonesia</a>, worth US$44.5 million, equivalent to 29.95% of Indonesia’s total imports.</p>
<p>Also, Chinese investment in Indonesia has <a href="https://www.bkpm.go.id/images/uploads/file_siaran_pers/Paparan_Bahasa_Indonesia_Press_Release_TW_IV_2019.pdf">rocketed</a> in the last five years. </p>
<p>In 2019, China was the second-largest investor with a total investment worth US$4.7 billion, equivalent to 17% of total investment. The increase in Chinese investment into Indonesia has begun to shift the dominance of Singapore as Indonesia’s top investor. </p>
<p>Despite having China as one of its main trade partners and top investor, Indonesia rarely uses Yuan in its transactions. The Indonesian Employers Association chairman Hariyadi Sukamdani said only 10% of Indonesia-China trade <a href="https://tirto.id/apindo-usul-yuan-gantikan-dolar-as-di-transaksi-perdagangan-ri-cina-da7g">used</a> the Yuan in 2018.</p>
<p>However, the Chinese government’s tendency to <a href="https://www.investopedia.com/trading/chinese-devaluation-yuan/">devalue its currency</a> means Indonesia faces some risks if it turns to Yuan.</p>
<p>In recent years, China often <a href="https://www.investopedia.com/trading/chinese-devaluation-yuan/">devalues</a> its currency to make it more responsive to market forces. In 2019, for example, Beijing <a href="https://www.nytimes.com/2019/08/05/business/economy/us-china-yuan-renminbi-trump.html">devaluated</a> the Yuan to make Chinese goods more competitive as the impacts of the trade war with the US began to bite.</p>
<p>If the Yuan is devalued, Chinese products will be cheaper and more competitive in the international market. </p>
<p>If Indonesia uses Yuan, Indonesian imports from China may soar, which would hit the domestic market. </p>
<p>Recently, Indonesian textile product entrepreneurs were <a href="https://www.cnbcindonesia.com/news/20200812110846-4-179176/ngamuk-lagi-gempuran-tekstil-impor-china-acak-acak-pasar">furious</a> to see rising textile imports entering the domestic market.</p>
<h2>Political implications</h2>
<p>Indonesia and China’s currency agreement will also strengthen China’s growing foothold in Indonesia.</p>
<p>China is Indonesia’s <a href="https://www.investindonesia.go.id/en/article-investment/detail/here-are-5-countries-with-biggest-foreign-direct-investment-in-indonesia">second biggest</a> source of foreign direct investment (after Singapore) and one of its major trading partners.</p>
<p>China has also <a href="https://thediplomat.com/2019/04/chinese-culture-gradually-penetrates-indonesia/">expanded</a> its cultural efforts through various events and initiatives, and <a href="https://indonesiaatmelbourne.unimelb.edu.au/chinas-confucius-institutes-in-indonesia-walking-a-fine-line/">established</a> Confucius Institutes across Indonesia.</p>
<p>China is also reportedly <a href="https://theconversation.com/why-china-may-want-a-military-base-in-indonesia-and-why-indonesia-is-right-to-reject-the-idea-146209">hoping</a> to establish a military base in Indonesia.</p>
<p>The agreement would mean make China not only has significant economic, cultural, and military influences in the country, but also a currency foothold in Southeast Asia’s largest economy.</p>
<h2>What’s next</h2>
<p>Indonesia must set the rules of the game to ensure the widening use of Yuan benefits both parties — not just China.</p>
<p>At the same time, Indonesia needs to make sure China’s devaluation policy will not harm the former’s economy in the future. One strategy would be to diversify Indonesia’s imports from countries other than China. Another is to encourage investments in agricultural sectors that will reduce imports.</p>
<p>Indonesia could also diversify its partners by establishing local currency settlements with other countries. </p>
<p>To date, Indonesia has signed local currency settlements with <a href="https://www.indonesia-investments.com/finance/financial-columns/local-currency-settlement-framework-indonesia-malaysia-thailand/item8414">Thailand</a>, <a href="https://www.indonesia-investments.com/finance/financial-columns/local-currency-settlement-framework-indonesia-malaysia-thailand/item8414">Malaysia</a> and <a href="https://www.liputan6.com/bisnis/read/4221034/ri-dan-korsel-setuju-penyelesaian-transaksi-dagang-lewat-mata-uang-lokal">South Korea</a>. To reduce its reliance on China, Jakarta could also establish local currency settlements with its non-traditional partners such as the EU and Gulf states.</p>
<p><em>Dendy Indramawan, an analyst at the Indonesian Banking Association, contributed to this article.</em></p><img src="https://counter.theconversation.com/content/147493/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muhammad Zulfikar Rakhmat tidak bekerja, menjadi konsultan, memiliki saham, atau menerima dana dari perusahaan atau organisasi mana pun yang akan mengambil untung dari artikel ini, dan telah mengungkapkan bahwa ia tidak memiliki afiliasi selain yang telah disebut di atas.</span></em></p>The agreement marks a key milestone in strengthening bilateral financial cooperation between the world’s largest exporter, China, and Southeast Asia’s largest economy, Indonesia.Muhammad Zulfikar Rakhmat, Lecturer in International Relations, Universitas Islam Indonesia (UII) YogyakartaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1282102019-12-03T19:45:02Z2019-12-03T19:45:02ZCurrency manipulation and why Trump is picking on Brazil and Argentina<figure><img src="https://images.theconversation.com/files/305014/original/file-20191203-67007-e5zemb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump says Argentina is intentionally weakening the peso. </span> <span class="attribution"><span class="source">FJZEA/Shutterstock.com</span></span></figcaption></figure><p>President Donald Trump <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">slapped new tariffs</a> on Brazil and Argentina after accusing them of manipulating their currencies to boost exports. </p>
<p>It wasn’t the first time Trump has labeled another country a “currency manipulator” for supposedly meddling to keep its own currency weak or undervalued. China <a href="https://www.reuters.com/article/us-usa-trump-china-currency-exclusive-idUSKBN1622PJ">received that epithet</a> from the president long before it felt the pain of his trade war. </p>
<p>But the truth is more complicated than Trump makes it out to be. </p>
<h2>Everyone does it</h2>
<p>The first thing to understand is that government efforts to influence their exchange rates – which is often dubbed currency manipulation – is extremely common, as I’ve seen firsthand in <a href="https://scholar.google.com/citations?user=qttICm8AAAAJ&hl=en&oi=ao">my work</a> as an international business professor.</p>
<p><a href="https://www.imf.org/en/Publications/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions/Issues/2019/04/24/Annual-Report-on-Exchange-Arrangements-and-Exchange-Restrictions-2018-46162">All but 31</a> of the <a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">International Monetary Fund’s 189 members</a> meddle, in a mild or total fashion, to influence or fix their exchange rates. Only a few major currencies, such as the dollar or euro, are allowed a “free float” based on market forces of supply and demand with minimal or no government intervention. </p>
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<p>Other governments have a variety of ways to manage their currencies. Some peg their currencies to a fixed rate, as long as they can afford to keep it there. Others tie their currencies to a major but stable currency like the euro or a basket of different ones. For example, the Lebanese pound is tied to the dollar at a fixed rate of 1,507.5 to 1. </p>
<p>About 16% of IMF members use a “managed float,” in which they allow market forces to play a role but with the government buying or selling their own currency as needed to bias the exchange rate upward or downward. Argentina and Brazil both adhere to a managed float system. </p>
<h2>Why weaken a currency</h2>
<p>Generally, when the Trump administration has criticized countries, the allegation is that their government is keeping its currency undervalued in order to <a href="https://www.investopedia.com/articles/investing/090215/3-reasons-why-countries-devalue-their-currency.asp">give an artificial boost</a> to exports while making it harder for imports to compete.</p>
<p>A weaker currency makes the products it sells abroad cheaper, while making imports more expensive for its consumers. This may have the effect of boosting jobs in that country. <a href="https://www.reuters.com/article/us-usa-trade-trump/trump-citing-us-farmers-slaps-metal-tariffs-on-brazil-argentina-idUSKBN1Y614O">Trump believes this is what Brazil and Argentina are doing</a>. </p>
<p><a href="https://www.wsj.com/articles/trump-restores-tariffs-on-steel-and-aluminum-shipped-from-argentina-brazil-11575288359">Economists say</a> the two countries are actually trying to prevent their currencies from weakening against the dollar. That’s in part because a weak currency also makes imports more expensive for businesses that rely on foreign inputs to make their products. </p>
<p>So higher import costs, along with persistently high inflation in both <a href="https://tradingeconomics.com/argentina/inflation-cpi">Argentina</a> and <a href="https://tradingeconomics.com/brazil/producer-prices">Brazil</a>, largely offset any gains from their weaker currencies. </p>
<h2>The strong dollar</h2>
<p>But more importantly, these currencies seem undervalued primarily because the U.S. dollar is unnaturally strong. </p>
<p>One reason for the strength of the dollar is that inflation-adjusted interest rates in the U.S. are still relatively high. Another is that the dollar is still a haven, making it an attractive place to park your cash during global economic uncertainty. </p>
<p>As a result, a massive amount of foreign money has <a href="https://www.stlouisfed.org/on-the-economy/2019/may/foreign-demand-currency-fed-balance-sheet">flowed into dollar denominated-bank deposits</a>, treasury bonds, U.S. stocks and real estate over the past few years. And the reality is that the dollar is now exceptionally strong, not that other currencies are weak or necessarily being manipulated. </p>
<p>Ultimately, labeling other countries as currency manipulators is more about politics and geopolitical relations than policy. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/does-china-manipulate-its-currency-as-donald-trump-claims-60148">article originally published</a> on July 13, 2016.</em></p><img src="https://counter.theconversation.com/content/128210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Most countries manipulate their currencies – at least a little – but at the moment that’s not the real reason they are undervalued relative to the dollar.Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers UniversityLicensed 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>
</figcaption>
</figure>
<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/669152016-10-31T19:03:17Z2016-10-31T19:03:17ZChina’s currency needs reform at home before gaining more traction internationally<p><em>Businesses and governments around the world are watching as China grows, innovates and extends its influence. We explore how the country got to where it is and what might be in store for its future in our series <a href="https://theconversation.com/au/topics/understanding-chinas-influence-32555">Understanding China’s Influence</a>.</em></p>
<hr>
<p>In Chinese, “renminbi” means the currency of the people. Yet for so long China’s currency has been an institution of state-run capitalism, serving vested interests under an investment driven growth model. The reforms that accompanied the yuan’s globalisation have helped transition China to a more sustainable economy by empowering consumers and private investors.</p>
<p><a href="https://www.imf.org/en/News/Articles/2016/09/30/AM16-PR16440-IMF-Launches-New-SDR-Basket-Including-Chinese-Renminbi">The yuan (or renminbi, RMB) was recently included</a> in the basket of currencies called the Special Drawing Rights (SDRs), used to value the International Monetary Fund’s (IMF) de facto monetary unit. This means the yuan has been accepted as an IMF endorsed international reserve currency, which is often widely used by central banks to hold foreign exchange reserves. Media <a href="http://www.afr.com/markets/chinas-new-reserve-currency-status-will-change-its-economy-20151129-glaoo5">estimates</a> suggest the SDR inclusion should lead to about US$42 billion of reserve assets being rebalanced into the yuan by central banks and reserve managers, at least in the medium term. </p>
<p>The yuan’s joining of the SDR reserve currency club, with the dollar, pound sterling, yen and the euro, is comparable to China’s accession to the World Trade Organisation (WTO) in 2001. Both heralded further opening up of the Chinese economy. </p>
<p>However, a notable difference with the SDR is that, compared with just commitments to enter the WTO, joining the SDR requires concrete reforms to meet the IMF’s standards. Apart from years of lobbying the IMF, the Chinese government has used a whatever-it-takes approach, supported from the very top of the political echelon, in its quest for the yuan’s international appraisal. </p>
<p>The yuan has become stronger in the global scene as China becomes the largest trader and the second largest economy in the world. </p>
<p>The government is promoting trade settled in yuan, it relaxed its control on capital and opened domestic financial markets. Yuan-denominated assets have multiplied and diversified and the setting of the yuan’s exchange rate is now more market-oriented.</p>
<h2>Relegation of the yuan lower down the priority list</h2>
<p>During my recent interviews, one official from the People’s Bank of China (the central bank) candidly said, “the last thing we want to talk about is the renminbi at the moment”. I heard the same a decade ago when the Chinese government was facing mounting pressure from the US over alleged undervaluing of the yuan. This time, however, it’s more of a domestic concern.</p>
<p>A largely speculative property market is sucking in capital from the real economy whose growth has been lacklustre in recent years, and forced an increase in the household debt level. </p>
<p>The 2016 <a href="https://www.imf.org/external/pubs/ft/scr/2016/cr16270.pdf">IMF review of the Chinese economy</a> also waved a red flag over China’s ballooning debt, which rose to a record 237% of gross domestic product (GDP) in the first quarter of 2016. The biggest chunk of the debt pile, 145% of GDP, goes to its corporate debt, a level that was “very high by any measure”. </p>
<p>Worries of a potential debt crisis and a lack of alternative investment channels have seen renewed flow of capital out of the country. A widely anticipated shakeup of the financial regulatory regime has been in disarray since <a href="http://www.bloomberg.com/news/articles/2016-05-17/as-china-regulatory-revamp-looms-pboc-gears-up-for-central-role">the stock market crash last year</a>. </p>
<p>So it’s not surprising to see that, although the government ensures stability of the yuan’s value, it has <a href="http://fortune.com/2016/10/25/china-yuan-rmb-offshore-forex/">devalued</a> by more than 1% after the SDR inclusion, approaching a new low in almost six years.</p>
<h2>The future of the yuan</h2>
<p>It’s worth noting that being part of the SDR basket is not a permanent status. The IMF reviews its elite currency group every five years, and those that fail to meet the standards may be removed. </p>
<p>In addition, an SDR membership is a milestone, but far from the final point in the yuan’s march of internationalisation. It’s convincing the market to accept the yuan that really matters. To achieve this, China needs to further liberalise and open up its economy and financial markets.</p>
<p>But perhaps the Chinese government’s logic in macroeconomic management is what is problematic. Instead of seeing yuan-related financial reform as hindering stability and growth, further reforms can not only consolidate and promote the yuan’s global status, but also hold the key in solving the big-picture issues at home. </p>
<p>Enhancing the power of the central bank, a liberal force in China’s financial governance and staunch promoter of the yuan, will enhance China’s macroeconomic capacity and overall financial and economic stability. Allowing freer capital flow will help deflate the overheated housing market and liberalising interest rates will increase the efficiency of financial resources and foster market-oriented debt. </p>
<p>Any efforts by China’s central bank to further align the yuan’s exchange rate to market expectations, ultimately leading to its free float, are likely to prepare domestic businesses for international competition. Businesses need the government’s shield, to establish international confidence in the currency and the Chinese economy.</p>
<p>The reforms have to go on. The yuan must serve the people before conquering the world.</p><img src="https://counter.theconversation.com/content/66915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hui Feng receives funding from the Australian Research Council. </span></em></p>The Chinese government should focus less on promoting the yuan internationally and more on domestic financial reform.Hui Feng, Future Fellow, Griffith Asia Institute and Centre for Governance and Public Policy, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/601482016-06-13T09:56:10Z2016-06-13T09:56:10ZDoes China manipulate its currency as Donald Trump claims?<blockquote>
<p>We have a lot of power with China. We can’t continue to allow China to rape our country, and that’s what they’re doing. </p>
</blockquote>
<p><strong>– <a href="http://www.cnn.com/2016/05/01/politics/donald-trump-china-rape/">Donald Trump</a>, May 1, Fort Wayne, Indiana</strong></p>
<p>After 20 years, the Chinese government must be used to being bashed by U.S. politicians and Congress for unfair trade practices or, as <a href="http://www.wsj.com/articles/ending-chinas-currency-manipulation-1447115601">Trump has declared many times</a>, being a “currency manipulator.” </p>
<p>Indeed, the exchange value of the yuan (also know as the renminbi or RMB) <a href="http://nbr.com/2016/01/14/why-the-chinese-currency-took-the-spotlight/">is fixed each morning</a> by its central bank, the People’s Bank of China (PBoC), with a narrow band of only 2 percent allowed, up or down, within which market forces can have their say. In effect, it is an exchange rate set and controlled by the PBoC. </p>
<p>But why pick on China? In fact, according to the International Monetary Fund (IMF), most governments try to influence their exchange rates, and China is not alone in trying to gain an advantage by undervaluing its currency. Moreover, the Chinese government has yielded to Western pressure over the past decade and let the yuan appreciate by a third, leading some economists (<a href="http://qz.com/412082/chinas-yuan-is-no-longer-undervalued-says-imf/">including the IMF</a>) to say it’s no longer undervalued. </p>
<p>One indicator of this is that, for a visitor, China is no longer cheap. I have been to China two dozen times since 1995 to teach in our Rutgers Executive MBA Program there. I experienced first how cheap everything was when the yuan was 8.27 per dollar. Then, after 2005, with the yuan being strengthened, and wages in China rising, China today is no longer the great bargain it once was – whether for a visitor like me, or a company looking for cheap goods to import.</p>
<p>So why do politicians like Trump keep bashing China? What does “undervaluation” or “overvaluation” of a currency mean? And what advantage can a nation derive from trying to control or manipulate its exchange rate? </p>
<h2>Everyone else is doing it</h2>
<p><a href="https://www.imf.org/external/np/sec/memdir/memdate.htm">Well over half</a> of the IMF’s 189 members meddle, in a mild or total fashion, to influence or fix their exchange rates, as illustrated in the chart below. </p>
<iframe src="https://datawrapper.dwcdn.net/MXESj/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>It is only with a few major currencies, such as the dollar or euro, that the government allows a “free float” based on market forces (global supply and demand) with minimal or no intervention (14 percent of all IMF members). Other governments have a variety of ways to “manage” their currencies. Some declare a “fixed peg” (26 percent of IMF members) or “currency board” (4 percent) where the exchange rate is fixed, by fiat, for a considerable period of months or years. </p>
<p>In “managed float” cases (28 percent), market forces are allowed to play, but with the government buying or selling their own currency in the market, as needed, to bias the exchange rate upward or downward. For example the <a href="http://www.thehindubusinessline.com/portfolio/how-rupeedollar-rates-are-determined/article4629962.ece">Reserve Bank of India will intervene</a> by buying dollars when the rupee appreciates too much and by selling them when its currency depreciates significantly.</p>
<p>“Adjustable pegs” (6 percent) are situations in which the government fixes the rate “temporarily” – for months at a time or even daily, as in the case of China. </p>
<p>What exactly is the concern when we accuse a government of “currency manipulation” and why is it considered bad in some instances, but not others? </p>
<p>Even the Japanese yen, a major currency considered to be “free floating,” was <a href="https://www.theguardian.com/business/2016/jan/29/japanese-yen-takes-a-deliberate-dive-to-keep-things-turning">consciously devalued</a> by about a third from 2012 – when it was considered significantly overvalued – to 2015. But this was not derided by members of Congress or U.S. politicians as currency manipulation since the U.S. has friendly relations with Japan, and the Japanese yen was not undervalued at the time as is alleged for the Chinese yuan.</p>
<p>Generally, when countries are criticized, the allegation is that the government is keeping its currency undervalued in order to give an artificial boost to exports while keeping out imports. This has the effect of boosting jobs in that country.</p>
<h2>Gains from currency manipulation</h2>
<p>Take China as an example. </p>
<p>A Chinese exporter earning a dollar in mid-2016 turns it into the bank and gets around 6.5 yuan. By comparing costs in China and elsewhere, some economists calculate that the exchange rate, based on hypothetical purchasing power parity (PPP), should be about 5.7 RMB per dollar, which would supposedly prevail under market equilibrium and without government meddling. <a href="http://www.wsj.com/articles/yuan-devaluation-enters-debate-on-whether-currency-is-undervalued-1439307298">Others disagree</a> and say that the yuan actual exchange rate is already close to the theoretical PPP calculation.</p>
<p>A 5.7 RMB per dollar PPP rate would mean that the 6.5 actual rate is 14 percent undervalued. And as a result, our Chinese exporter earns 14 percent more in revenue with the 6.5 yuan exchange rate than if market forces alone were at work and the economists’ hypothetical rate were to prevail. That gives the Chinese exporter an advantage. </p>
<p>It also helps domestic Chinese companies (that would compete against imports) because the actual 6.5 rate makes imports 14 percent more expensive than they might be if the rate was 5.7 RMB per dollar. This, it is alleged, keeps some foreign products out of China and benefits (or protects) Chinese businesses that produce substitute products that compete with imports. On both the import and export side, an undervalued exchange rate boosts or preserves jobs in China (at the expense of jobs in the rest of the world).</p>
<h2>Over or under?</h2>
<p>For the Chinese, however, it must be particularly galling to hear accusations of currency manipulation since, succumbing to pressure from Western countries, they <a href="http://qz.com/412082/chinas-yuan-is-no-longer-undervalued-says-imf/">have already massively appreciated</a> their currency since 2005. </p>
<p>Since June 2005, following more than a decade of a fixed exchange rate of 8.27 yuan per dollar (when it was indeed clearly undervalued) the Chinese have gradually appreciated their currency to as high as 6.1 RMB per dollar in 2015. </p>
<p>Now, in the <a href="http://www.reuters.com/article/us-china-economy-yuan-idUSBREA4C07420140513">minds of many Chinese economists</a>, their currency is no longer undervalued in the current range of 6.2–6.5 a dollar for three reasons:</p>
<ol>
<li><p>The 36 percent appreciation from June 2005 to July 2015 meant that Chinese exporters were earning up to a third less last July than in 2005, making some <a href="http://www.chinalawblog.com/2011/05/foreign_manufacturing_in_china_would_the_last_company_there_please_turn_out_the_lights.html">uncompetitive</a>. Many have had to shut down in China and relocate to Vietnam, Bangladesh or a country in Africa. The stronger yuan also displaced some domestic production that couldn’t compete with imports that became less expensive for Chinese consumers. As a result, jobs were lost, and the <a href="http://www.wsj.com/articles/SB10001424052702303848104579312393856894058">Chinese economy suffered</a>. </p></li>
<li><p>The yuan, which is fixed mainly against the U.S. dollar, <a href="http://fortune.com/2015/08/11/why-china-devalued-yuan/">has appreciated even more</a> against other currencies. That’s because, as the dollar has climbed against most other currencies since 2013, the yuan has also appreciated against them, adding to its increase in value against the dollar. And that means customers in Europe, Brazil or elsewhere may be paying over 50 percent more to import Chinese goods (in their local currencies) than they were about a decade earlier. </p></li>
<li><p>Wages and prices are surging in China. On the east coast, where most manufacturing and economic activity takes place, wages <a href="http://www.chinabusinessreview.com/chinas-rising-costs/">have been climbing</a> at least 15 percent a year. The rising demand for and cost of labor, coupled with the one-child policy (which was in effect until last year), has caused the labor force to plateau and left many jobs unfilled. Chinese exporters are beginning to feel the squeeze between these rising costs (especially in real estate) and the falling value (in yuan) of the foreign currency they receive. </p></li>
</ol>
<h2>Is the RMB still undervalued?</h2>
<p>While many Western economists <a href="http://www.wsj.com/articles/yuan-devaluation-enters-debate-on-whether-currency-is-undervalued-1439307298">continue</a> to argue that the yuan (RMB) is still undervalued, they tend to agree that at the very least that it’s <em>less undervalued</em>. </p>
<p>The chart below shows that the huge 40.6 percent devaluation of the early 1990s massively undervalued the yuan and accomplished its purpose of making China the world’s leading exporter of manufactured goods. But since 2005, steady appreciation led to its regaining all the ground it had lost in the 1990s. </p>
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<p>Add to that wage inflation in the 2005–2016 period (based on the plateauing of the labor force because of the one-child policy), and many would argue that the yuan is no longer undervalued.</p>
<h2>Why pick on China?</h2>
<p>So why pick on only China when other nations also “influence” their currencies and the case can now be made that the yuan is no longer undervalued (or at least not significantly so)?</p>
<p>Governments are always concerned about the undervaluation or overvaluation of their currencies since they affect exports, imports and competition in general. Free market oriented economists and pundits are critical of countries that intervene or seek to influence their exchange rates. </p>
<p>Others would argue that much of world’s economies are not yet mature, and their institutions not yet evolved enough for their governments to take the risk of such a “hands-off” policy. Besides, they would say that even in a free market oriented country like the U.S., the Federal Reserve has enormous influence on the value of the dollar. When interest rates are lowered (or raised), the dollar weakens (or appreciates), other things being equal.</p>
<p>Japan is one of the U.S’. top trading partners. If we want a more egregious recent example of a currency being deliberately devalued to give its exporters an advantage, we need look no further than the supposedly free market country of Japan. As noted above, the Shinzo Abe government of Japan induced an almost 50 percent devaluation of the yen in just three years.</p>
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<p>For Trump, China makes an easy punching bag. Why pick on China alone when the Chinese government has, since 2005, raised the value of the yuan value by a third so that the yuan is at least close to where it might be in a hypothetical market-driven situation? </p>
<p>At the end of the day, exchange rates around the world fluctuate greatly, whether through government intent, interest rate changes or market sentiment. Picking on only one country like China, however, is a poor substitute for good economic policy.</p><img src="https://counter.theconversation.com/content/60148/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Farok J. Contractor does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Trump is only the latest U.S. politician to bash China over its trade and currency policies. Is the criticism fair?Farok J. Contractor, Distinguished Professor of Management & Global Business, Rutgers 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/488042015-11-02T11:03:18Z2015-11-02T11:03:18Z‘Rise’ of China’s yuan is much ado about little<figure><img src="https://images.theconversation.com/files/100393/original/image-20151030-16510-ffhl7u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The yuan has a long way to go.</span> <span class="attribution"><span class="source">Yuan dollar via www.shutterstock.com</span></span></figcaption></figure><p>China’s currency, the yuan, recently (and briefly) became the <a href="http://www.swift.com/about_swift/shownews?param_dcr=news.data/en/swift_com/2015/PR_RMB_special_edition_sibos.xml">world’s fourth-most-used form of payment</a>, behind the US dollar, euro and pound sterling, having (marginally) pushed past the Japanese yen. </p>
<p>Last week, China’s central bank <a href="http://www.bloomberg.com/news/articles/2015-10-22/china-said-to-weigh-pledge-for-opening-capital-account-by-2020-ig1sbvez">discussed</a> whether to make an explicit pledge to dismantle the capital controls that prevent the yuan from becoming fully convertible with other currencies at rates determined by the market. </p>
<p>Does all this mean the yuan’s heyday has finally arrived? Hardly. </p>
<p>As we will see, there is less significance to this phenomenon – and talk of the yuan becoming an “official IMF reserve currency” – than media headlines suggest. </p>
<h2>A drop in the bucket</h2>
<p>The yuan still accounts for a small fraction of world payments, <a href="http://www.scmp.com/business/markets/article/1873623/share-chinese-currency-slides-global-payments">2.45%, to be precise</a> in September after <a href="http://www.bloomberg.com/news/articles/2015-10-06/yuan-overtakes-yen-as-world-s-fourth-most-used-payments-currency">edging up to 2.79%</a> – and fourth place – a month earlier. This is less than a third of the pound’s 9% share, a tenth of the euro’s 29% and a drop in the bucket of the dollar’s 43%. </p>
<p>Another measure of a currency’s international prevalence is in <a href="http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4">foreign exchange reserves</a>, which result from the accumulation of export surpluses. </p>
<p>The yuan <a href="http://www.bloomberg.com/news/articles/2015-08-04/imf-says-more-work-needed-before-yuan-reserve-currency-decision">accounts</a> for just 1% of other countries’ allocated reserves, compared with 64% for the dollar, even though China accounts for the same <a href="http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=CN&">share of world trade</a> (about 12%) as the US. </p>
<p>In other words, the yuan is underrepresented in payments and reserves relative to its share of world trade, while the dollar is similarly overrepresented, due to the popularity among investors and governments of the US’ broad, liquid and secure capital markets.</p>
<p>Market forces alone should lead one to expect the yuan’s share to rise and the dollar’s to fall over time. </p>
<p>Matching the currency used in payments and receipts in trade and investment reduces transaction costs, currency risk and volatility exposure, so more people will want to use the yuan as their transactions with China increase.</p>
<h2>A shift away from trade</h2>
<p><a href="http://data.worldbank.org/country/china">China’s share of world GDP</a> (13.3% in nominal terms as of 2014) will likely rise as its economy continues to outpace the average of other large economies. But use of the yuan for payments and reserves may increase at a slower pace as China shifts away from an economy fueled by trade.</p>
<p>This is because China plans to <a href="http://www.reuters.com/article/2013/03/05/us-china-parliament-idUSBRE92402R20130305">reduce</a> its reliance on export-led growth and increase <a href="http://data.worldbank.org/indicator/NE.CON.PETC.ZS">domestic consumption as a share of GDP</a> (which is currently very low). </p>
<p>Though there are few signs of this happening so far, the plan, if successful, means that trade as a share of GDP will begin to shrink. And that will likely mean slower growth in use of the yuan than in the recent past.</p>
<h2>The difficult road to becoming a reserve currency</h2>
<p>To become an “official” IMF-endorsed “reserve currency,” China has to meet various criteria that would make the yuan “freely usable”: that is, readily bought and sold by anyone at any time. </p>
<p>These criteria include a market-determined interest rate, exchange rate flexibility and convertibility, a more open capital account, and a significant share of official reserves, international banking liabilities and global debt securities. While many steps have been taken in these directions, including very recently, none of these criteria is close to being fully achieved. </p>
<p>All this requires politically and technically difficult domestic financial market reforms and liberalization. Such reforms reduce the <a href="http://www.atlanticcouncil.org/images/publications/RMB_Ascending.pdf">government’s ability</a> to establish policies that reduce volatility and encourage growth. That’s because of what is known as the “trilemma” of international finance, in which only two of the three goals of monetary policy – control of interest rates, exchange rate flexibility and capital mobility – can be achieved at the same time. </p>
<h2>Market manipulations</h2>
<p>The Chinese government’s own reactions to this past summer’s <a href="https://theconversation.com/explainer-chinas-black-monday-and-global-market-turbulence-46566">financial market turmoil</a> suggest that it is not ready to undertake or complete many of the required reforms. </p>
<p>Its <a href="http://www.slate.com/blogs/moneybox/2015/08/31/china_s_stock_market_intervention_the_government_intervened_for_the_sake.html">interventions</a> show that it is not yet willing to allow market forces to rule in its currency and financial markets. This includes its effort to halt the precipitous decline of an overvalued stock market – which it itself had previously boosted – and to <a href="http://money.cnn.com/2015/08/11/news/economy/china-yuan-devaluation-stocks-market/">devalue</a> the yuan by the largest amount in two decades. </p>
<h2>Trust must be earned</h2>
<p>Even if the IMF designates the yuan as a reserve currency, this does not mean that its use as such will rise quickly or greatly. World central banks and individual investors will only increase their use and holdings of yuan if they have confidence in the currency. </p>
<p>And that won’t happen until Chinese financial markets develop the depth, diversity, transparency and security that have kept the dollar reigning supreme as the world’s preferred reserve currency, even as the US share of global trade and investment has declined. </p>
<p>Governments are understandably reluctant to hold reserves in a politically managed rather than market-determined currency. </p>
<p>The trust of market actors has to be earned over time and cannot be merely conferred by an international body like the IMF.</p>
<h2>Benefits and disadvantages</h2>
<p>There are some benefits when a currency becomes more widely used in the global monetary system – its “internationalization” – regardless of whether it gets the IMF’s imprimatur. </p>
<p>One benefit is “seignorage,” which is the revenue the issuer gets from the value of a currency over and above the cost of producing it. Others include a looser (more stimulative) monetary policy, enabling (marginally) faster growth, and the ability to borrow and invest internationally in one’s own currency, thus avoiding currency risk.</p>
<p>But there are also disadvantages, including losing control over the effectiveness of monetary policy and exposing the domestic economy to destabilizing (and increasingly volatile) global capital flows. </p>
<p>This is why small open economies like <a href="http://www.bis.org/publ/bppdf/bispap15l.pdf">Singapore</a> and Switzerland, whose currencies are popular with international investors, have long resisted internationalization. In contrast, China seems to regard reserve currency status as <a href="http://www.cifr.edu.au/assets/document/CIFR%20Internationalisation%20of%20the%20RMB%20Report%20Final%20web.pdf">desirable</a> for its own sake, as a “status good” conferring an assumed prestige that it craves.</p>
<p>In the longer run, both China and the world economy stand to gain from increased international use of the yuan. China will benefit from the domestic financial market reforms that internationalization will require, and the rest of the world will get a more diverse basket of currencies to choose from to finance trade and investment and hold reserves, reducing the current overdependence on the US dollar. </p>
<p>This should also help us avoid the chronic and excessive trade and financial imbalances among countries.</p>
<p>But before we can get there, China needs to follow through on <a href="http://www.economist.com/news/special-report/21668719-china-shakes-worldbut-not-way-it-hoped-longer-march">major reforms</a> of its domestic financial system, which will not be quick, easy or certain.</p><img src="https://counter.theconversation.com/content/48804/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Linda Lim does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Recent headlines suggesting the yuan is on the verge of becoming an international currency stray far from reality.Linda Lim, Professor of Strategy, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460722015-08-14T02:35:59Z2015-08-14T02:35:59ZForget about a ‘currency war’; we’ll have bigger worries off a weaker yuan<p>The decline in the yuan is not really very large, and the way in which it happened is not all that nefarious. The Chinese central bank normally intervenes heavily in the currency market and they have historically kept it fairly closely linked to the US dollar while smoothing out day-to-day fluctuations.</p>
<p>That stopped, abruptly, on Tuesday. Yet, as Chinese authorities pointed out, absence of intervention is really just allowing a more market-determined price - hardly a cause for alarm. Of course, that market-determined price is, conveniently, lower, hence making China’s goods cheaper for foreign purchasers and hence boosting exports.</p>
<p>However, this has all occurred against the backdrop of a rising US dollar, fuelled by a recovering US economy and the prospect of the US Federal Reserve raising interest rates from historic lows, perhaps as soon as next month. </p>
<p>Put simply, the absence of a Chinese intervention to effectively appreciate the yuan is quite different from an intervention to devalue it. It has been the latter mis-characterisation that dominated most reporting of last weeks events.</p>
<p>China’s actions are less dramatic, and hence less provocative than has been reported. And even though there are many members of the US Congress who have long decried China - with some justification - as a currency manipulator for not letting the yuan appreciate more, they won’t be able to trigger a retributive devaluation of the US dollar. Even the <a href="http://www.ronpaul.com/audit-the-federal-reserve-hr-1207/">“audit the Fed”</a> nonsense proposed by Kentucky Senator Rand Paul is on slow burn while Paul concentrates on his presidential hopes.</p>
<p>What is genuinely concerning is what this reveals about the state of the Chinese economy. The fact that Chinese authorities are willing to do something unusual and generate so much bad publicity is the surest sign to date that the Chinese economy is slowing, or has slowed, more than markets previously thought.</p>
<p>While official figures say that the Chinese economy is growing at an annual rate of 7% there have long been concerns about the voracity of those figures, and the recent devaluation only heightens those concerns. Moreover, that growth is not uniformly spread across China. There have been anecdotal accounts that some regions of China have close to zero growth. The devaluation suggests that there may be something to those accounts.</p>
<p>If Chinese growth slows significantly then commodity prices will likely fall further, and the US and European economies will take a serious hit because of their exposure to China. Worse still, there is already a firehose of Chinese capital looking for investment opportunities. Fewer opportunities domestically will only exacerbate this imbalance and it is this imbalance that many see as a driver of “secular stagnation” - a permanent lowering of economic growth in the US and other advanced economies.</p>
<p>Should this scenario eventuate, Australia certainly won’t be spared. China is our largest export market, accounting for around one quarter of our exports. The recent fall in the iron ore price has had a significantly negative effect on the federal budget because of declining tax receipts, and if Chinese growth slows further we can expect more bad news in this regard.</p>
<p>The Australian dollar initially appreciated against the yuan last week, which would not have pleased Reserve Bank Governor Glenn Stevens. Yet the rise against the yuan was relatively modest and the Aussie dollar fell against the US dollar. In any case, our currency has fallen by so much - more than 25% against the US dollar - in the last 12-18 months that the recent changes are basically rounding error.</p>
<p>The big issue for Australia is not a slight increase in the cost of our goods for Chinese buyers, it’s the fact that there may be much lower Chinese demand period. Significantly lower growth means less construction and weaker consumer demand - and that means lower iron ore and primary produce exports.</p>
<p>That makes the successful passage of the Chinese Australia Free Trade Agreement all the more pressing. With our largest market spluttering we desperately need to lower trade barriers, not be consumed by ideological misinformation campaigns about labour market testing and 457 visa rules.</p>
<p>It would be surprising if the recent moves by China’s central bank ended up triggering a currency war. But those actions may signal a material slowdown in the growth of the Chinese economy that will have significant repercussions for the rest of the world. It’s not currencies we should be worrying about, but output and growth.</p><img src="https://counter.theconversation.com/content/46072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>China’s actions around the yuan are less dramatic than they have been portrayed. But what’s behind the drop is the major worry for Australia.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/460652015-08-13T18:14:12Z2015-08-13T18:14:12ZUS shouldn’t fret over cheaper yuan: China’s growing middle class will keep buying ‘Made in America’<figure><img src="https://images.theconversation.com/files/91806/original/image-20150813-21387-1je95vd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A change in the scales isn't likely to put a major dent in the growth in US exports to China.</span> <span class="attribution"><span class="source">Yuan dollar via www.shutterstock.com</span></span></figcaption></figure><p>News that the People’s Bank of China, the country’s central bank, changed its formula for calculating the reference rate of the yuan (RMB) prompted the currency to <a href="http://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation">fall</a> to a four-year low. </p>
<p>Essentially, the People’s Bank of China is now <a href="https://theconversation.com/explainer-why-is-china-devaluing-its-currency-46034">calculating</a> the reference rate on a daily basis and incorporating market forces. Some financial experts <a href="http://online.barrons.com/articles/chinas-yuan-play-a-complex-puzzle-for-stocks-1439431538">argue</a> that allowing market forces to help determine the value of the yuan is logical, while others assert that China is merely trying to boost its own exporters – at the expense of foreign companies – by making their products relatively cheaper in the global marketplace.</p>
<p>Many in the US are concerned that our businesses will be hurt, with some <a href="http://www.bloomberg.com/news/articles/2015-08-11/yuan-devaluation-creates-fresh-china-conundrum-for-u-s-treasury">accusing</a> China of currency manipulation. </p>
<p>The truth is, however, the value of the yuan doesn’t matter that much: China’s swelling middle class and its insatiable demand for foreign (and US) products and services will easily offset the impact from a cheaper yuan. For now, anyway.</p>
<h2>Growth in trade</h2>
<p>Having been a professor and director of the Center for International Business Education and Research (CIBER) in the Eli Broad College of Business since 2001, I am always <a href="https://bps.broad.msu.edu/media/documents/55b1817310edd53230b5c844.pdf">intrigued</a> by dynamics and influences in international business, trade and global competitiveness. </p>
<p>Much of what we do as a federally funded CIBER – one of only 17 in the country – is to strive to make US companies as competitive globally as possible. </p>
<p><a href="http://www.mhprofessional.com/product.php?isbn=0071827420">Research</a> I conducted this year shows that customers expect companies to <a href="https://twitter.com/tomashult/status/604514002782306304">sell</a> 49% more in global markets in the next two decades. </p>
<p>Historically, this anticipated increase is primarily related to exporting more products to China. US companies have boosted their exports to China by more than 500% in the last decade, compared with an average of only a little over a 100% increase to the rest of the world.</p>
<p>On the other side of the equation, US imports from China <a href="https://www.census.gov/foreign-trade/balance/c5700.html">seemed</a> to have stabilized (not growing as much) before the devaluation of the yuan. A cheaper RMB will destabilize the export-import dynamics, but mostly in the short run.</p>
<p>Regardless of China’s <a href="http://www.reuters.com/article/2015/08/12/us-china-markets-yuan-cenbank-idUSKCN0QH1XY20150812">motive</a> (whether an intentional devaluing of the yuan to spur exports and economic growth or a competitive-based market adjustment), a weaker currency generally leads to a decrease in imports because it is more expensive to buy foreign products.</p>
<h2>The rise of the ‘mainstream’</h2>
<p>In the case of US products and services, the likelihood is that the trend of annual increases of exports to China will slow down but that we will see overall increases nevertheless, just not as significant, perhaps, as in the past decade. </p>
<p>This will hurt the top exporting industries from the US to China, such as crop production, computers and electronics, and chemicals, but, importantly, at the same time we expect to see a pretty drastic increase in the so-called Chinese mainstream consumers.</p>
<p>That is, we expect that this population in China (read: middle class) will go from about 20 million to 200 million people in the <a href="http://www.mckinsey.com/insights/consumer_and_retail/mapping_chinas_middle_class">next five years</a>. </p>
<p>In other words, in all likelihood, even though the yuan may weaken the purchasing power of Chinese consumers, we can expect the overall increase in mainstream (and affluent) shoppers to more than offset this decrease in the value of the yuan. </p>
<p>By extension, urbanization in China has a chance to divide the country’s people in a more marked way due to the yuan devaluation. </p>
<p>Specifically, while the top 100 Chinese cities (advanced and developing cities) will soon be made up of a vast majority of affluent and mainstream customers, the other parts of the country will be financially much weaker. And while the yuan trading at a lower value might benefit the advanced and developing cities in China, the emerging and lagging cities will not see the same benefit.</p>
<h2>China’s conundrum</h2>
<p>Perhaps the People’s Bank of China realized this conundrum already when, almost immediately after devaluing the yuan, it reversed course by selling off US dollars to stabilize its currency. </p>
<p>It also put out statements basically saying that there is no practical basis to <a href="http://economictimes.indiatimes.com/opinion/interviews/yuan-to-fall-more-but-recent-events-do-not-change-long-term-view-on-china-stephen-roach-yale-university/articleshow/48462519.cms">expect</a> that the trend of a depreciating yuan will be a long-term phenomenon. </p>
<p>The opposite view is interesting though.</p>
<p>The reality is that the yuan has been appreciating for the last decade, many say intentionally so, at the hands of the central bank. This <a href="http://www.forbes.com/sites/kenrapoza/2015/08/11/in-recent-devaluation-china-takes-step-towards-market-liberalization/">appreciation</a> has helped slow the economy from double-digit growth to just single digits. It has also meant that strategically, China has opted to focus on social stability, steady growth and maintaining the Chinese market as an attractive investment instead of the long run of unprecedented growth.</p>
<p>Whether these stabilizing mechanisms will be viewed by the US and the rest of the world as currency manipulations or as more market-based financial strategy remains to be seen. </p>
<p>What we do know is that China remains an incredibly important market to trade into and buy from, and the expected drastic increase in the total number of mainstream individuals there is an important part of developing a long-term strategy for selling into China regardless of the relatively small fluctuations in the yuan. </p>
<p>This could change, though, if the yuan is pushed a lot lower and US consumers end up snapping up far more Chinese products. But so far, that doesn’t appear to be the case.</p><img src="https://counter.theconversation.com/content/46065/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tomas Hult receives funding from U.S. Department of Education, National Science Foundation, and Michigan Economic Development Corporation. He is also executive director of the Academy of International Business and president of the Sheth Foundation, and serves on the US District Export Council.
</span></em></p>China’s interventions to cheapen its currency relative to others will hurt US imports in the short term, but the country’s surging “mainstream” will easily offset the impact.Tomas Hult, Byington Endowed Chair and Professor of International Business, Michigan State 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/460192015-08-12T03:36:33Z2015-08-12T03:36:33ZThe irresponsible stakeholder?<figure><img src="https://images.theconversation.com/files/91541/original/image-20150812-18064-e3r1ck.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><span class="source">EPA/How Hwee Young</span></span></figcaption></figure><p>Whatever China’s policymakers do these days matters a lot, and not just to the denizens of the People’s Republic. On the contrary, for better or worse what happens in China has a powerful and often immediate impact on the rest of the world. True, it doesn’t take much for the world’s financial markets to have an attack of the vapours, but the events of the last few days provide a stark illustration of just how important China is to the global economy.</p>
<p>One of the more improbable nostrums of political life is that with great power comes great responsibility. It’s a nice idea, but one that is not supported by a great deal of evidence. Despite famously calling for China to act as a “responsible stakeholder” in the international system, the United States’ own record in this context doesn’t bear close scrutiny. </p>
<p>We are, after all, still collectively engaged in one of the biggest economic experiments in history – quantitative easing, aka, money printing. This policy was embarked upon because it was judged to be in America’s perceived national interests. Its intention was to pump liquidity into a still-fragile economy and put downward pressure on the American dollar. Significantly, it was done with little regard for its possible impact on other countries, especially the potentially volatile and vulnerable emerging markets.</p>
<p>Powerful nations do these sorts of things because they can. No-one can stop the US from acting unilaterally no matter what the collateral damage may be. Should we expect anything different from China, despite its claims of solidarity with the normally marginalised countries of the so-called developing world? Perhaps not.</p>
<p>And yet given that China is trying to position itself as a central player in both the existing institutional order created by the US, as well as its own vision of an alternative regime with China at its centre, the decision to devalue its currency cannot have been taken lightly. Officials at the People’s Bank of China must have understood that their actions would attract great attention and have significant economic and political consequences.</p>
<p>So why would China’s top leaders authorise a policy that would send such mixed messages about its international role and domestic circumstances? They must have realised that such actions would potentially reignite the so-called currency wars and raise questions about including the yuan in the IMF’s basket of currencies that constitute “special drawing rights” – a long-held ambition of China’s economic elites.</p>
<p>Under the circumstances it’s not unreasonable to infer that China’s leadership is so worried about the state of the domestic economy that it is prepared to wear some international criticism and reputational damage because the risks of not doing so are simply too great. The legitimacy of the Chinese government rests overwhelmingly on its ability to keep delivering economic growth and development. Xi Jinping recognises this and has apparently given his support to recent moves.</p>
<p>Whether a relatively minor adjustment in the value of the yuan will have much affect is quite another question. The downturn in domestic manufacturing, for example, is unlikely to be reversed by a marginal change in its competitiveness. Even more importantly and paradoxically, the local governments that have tried to shore up their deteriorating balance sheets by borrowing offshore will suddenly find the cost of repaying such loans has gone up markedly.</p>
<p>China’s communist leaders have proved themselves to be rather good at running a capitalist economy, thus far. But its very success may have ramped up expectations in unsustainable and dangerous ways. The recent gyrations in Shanghai’s stock market are the most visible manifestation of China’s version of irrational exuberance. The thousands of unoccupied apartment blocks across China are an even more tangible testament to the formerly irrepressible dynamism of the Chinese economy.</p>
<p>All of this matters enormously for Australia. It is not just the resource sector that has gone from boom to bust in the blink of any eye. China’s cannier investors are assiduously working to shift their – sometimes ill-gotten – wealth offshore, out of reach of Chinese authorities and an increasingly wobbly looking domestic economy. Australian real estate – even in Sydney – still looks comparatively cheap and safe. </p>
<p>All of this is contributing to increased capital flight from China. This may have major consequences for the likes of Australia.</p>
<p>While all this may create headaches for Australian policymakers, we shouldn’t be too surprised that their counterparts in China are putting domestic priorities ahead of possible international responsibilities. Even allies have been known to behave in this way. So why should we expect a notional strategic rival to act any differently? </p>
<p>In the absence of an international institution with the capacity to actually influence the behaviour of some of its more powerful members we should expect to see the continuing privileging of the domestic over the international. Despite growing economic interdependence and the undoubted benefits it brings, the prospects for effective collaborative economic management look as remote as ever.</p><img src="https://counter.theconversation.com/content/46019/count.gif" alt="The Conversation" width="1" height="1" />
Whatever China’s policymakers do these days matters a lot, and not just to the denizens of the People’s Republic. On the contrary, for better or worse what happens in China has a powerful and often immediate…Mark Beeson, Professor of International Politics, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.