Taming Africa
Charlie Pistorius*
12 September 2011 08:36
Increasingly the world’s media is delving into the subject of how the Chinese currency – the Renminbi or yuan in reference to physical notes and coinage – is adapting to win reserve status. Curiously though, this debate is centred less on the integration of the Renminbi into the global monetary system, but rather, on how fast China can manage the necessary changes as it seeks to introduce a more “user-friendly” yuan outside of China’s borders.
Nearly a century ago the dollar toppled the pound as the world’s reserve currency, how? Mainly due to the increased use of the dollar in trade settlements, which as the US upped its trade footprint, eased the cost of trade financing for them. This dynamic should sound rather familiar today if one reads China into the place of the US or Japan. Affirming the Dollar’s position as the international reserve currency was in short, as a result of the world’s major central banks accepting the Dollar as the “safest store of value”.
More recently, at G20 and high-level statesmen events, Chinese delegates have pushed the agenda towards including the Chinese Renminbi into a basket of International Monetary Fund (IMF) convertible currencies, known as Special Drawing Rights (SDRs), which collectively and individually hold the status of reserve currencies.
Historically the calls for a “supra-sovereign” reserve currency or reintroduction of a Bullion Basket has been loud and plentiful, but drowned out by the world’s disproportionate dependence on the dollar. Yet now in the wake of a fractured dollar-regime, these calls are seeing a lot of renewed interest, and airtime at the highest level.
The dollar and euro collectively contribute almost 95% of currency notes being traded, although their share is dropping, especially in the midst of the United States and Europe’s declining contribution to global growth, the drop is however both slow and tentative.
As Hong Kong has just recently been opened as a base to raise Renminbi for Mainland China’s project finance, and also started attracting huge investments in yuan-denominated instruments, the confidence in the gradual and on-going appreciation of the Chinese currency, coupled with the increasing use of Renminbi in trade transactions, is rapidly shifting the Chinese currency into the reserve status fray. This shift is finding increasing momentum and support. For instance, it is now widely expected that by 2015, between 30-50% of China’s global trade could be conducted in Renminbi, causing a profound and shocking effect on the global financial balance of power.
China’s ‘Go Global’ strategy – which was put forward as an incentive-driven policy that promotes Chinese firms (largely state-owned or state-aligned) to rigorously go out and pursue strategic assets – has been wonderfully successful, and greatly elevated their economic fortunes and global trade hegemony. Now as the pillars of the dollar-denominated financial system are cracking, the Chinese want their currency to become an accepted ‘safe store of value’. This cannot simply happen by itself, to allow this change to take place China’s policymakers must transition towards liberalisation of the country’s many financial barriers (at a grand scale). This shift however comes with its own challenges and risks.
It is apt timing therefore reading the headlines from the Financial Times to think-tanks and blogs, questioning the resilience of the global banking system as it exists today, and asking whether it instils confidence or tears. Personally, I suspect that China’s role in this ‘potjiekos’ debate will provide the proverbial spice.
The back story
The calls for China to rebalance its internal savings-investment imbalances have echoed loudly in the wake of the Global Financial Crises (GFC). Yet it is as pertinent now as ever before. On the back of the dramatic drop in developed economies’ (think US and EU) consumption demand, and their on-going spate with sovereign bankruptcy, the commercial and private sectors around the world have seriously begun to fear the spectre of a double-dip recession (what they call it if post-recession recovery never took off).
Read rest of articleMore recently, at G20 and high-level statesmen events, Chinese delegates have pushed the agenda towards including the Chinese Renminbi into a basket of International Monetary Fund (IMF) convertible currencies, known as Special Drawing Rights (SDRs), which collectively and individually hold the status of reserve currencies.
Historically the calls for a “supra-sovereign” reserve currency or reintroduction of a Bullion Basket has been loud and plentiful, but drowned out by the world’s disproportionate dependence on the dollar. Yet now in the wake of a fractured dollar-regime, these calls are seeing a lot of renewed interest, and airtime at the highest level.
The dollar and euro collectively contribute almost 95% of currency notes being traded, although their share is dropping, especially in the midst of the United States and Europe’s declining contribution to global growth, the drop is however both slow and tentative.
As Hong Kong has just recently been opened as a base to raise Renminbi for Mainland China’s project finance, and also started attracting huge investments in yuan-denominated instruments, the confidence in the gradual and on-going appreciation of the Chinese currency, coupled with the increasing use of Renminbi in trade transactions, is rapidly shifting the Chinese currency into the reserve status fray. This shift is finding increasing momentum and support. For instance, it is now widely expected that by 2015, between 30-50% of China’s global trade could be conducted in Renminbi, causing a profound and shocking effect on the global financial balance of power.
China’s ‘Go Global’ strategy – which was put forward as an incentive-driven policy that promotes Chinese firms (largely state-owned or state-aligned) to rigorously go out and pursue strategic assets – has been wonderfully successful, and greatly elevated their economic fortunes and global trade hegemony. Now as the pillars of the dollar-denominated financial system are cracking, the Chinese want their currency to become an accepted ‘safe store of value’. This cannot simply happen by itself, to allow this change to take place China’s policymakers must transition towards liberalisation of the country’s many financial barriers (at a grand scale). This shift however comes with its own challenges and risks.
It is apt timing therefore reading the headlines from the Financial Times to think-tanks and blogs, questioning the resilience of the global banking system as it exists today, and asking whether it instils confidence or tears. Personally, I suspect that China’s role in this ‘potjiekos’ debate will provide the proverbial spice.
The back story
