China wants the renminbi to replace the dollar, in its bid to make a global run

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By Shantanu Guha Ray in Shanghai

Shock and awe The recently concluded Shanghai World Expo 2010 pavilion, primed to raise heartbeat levels
Shock and awe The recently concluded Shanghai World Expo 2010 pavilion, primed to raise heartbeat levels

HUGE VESSELS transport minerals daily along the Yangtze river to the world’s largest cargo port in Shanghai, China’s most populous city, which exerts a major influence over global finance and trade. Last week, as millions crammed the venue of the World Expo 2010 — spread 5.28 sq km across the city — to see displays from 190 nations and over 50 MNCs, planners debated whether it is time to groom their currency, which still clings to the greenback, for a larger global role.

Rather than only the US dollar, Beijing wants to use a basket of its biggest trade partners’ currencies to manage the yuan’s levels. The South Korean won, the Indian rupee and the Canadian and Australian dollars could be in the mix.

No one, including India, doubts a more flexible exchange rate would serve longterm interests of fast-growing Asian nations, and reduce their dependency on the western currencies. In fact, India has argued that such a move will help the countries reorganise their industries and remove outdated capacities. Says The Economist, this is what US Treasury Secretary Tim Geithner, too, might propose to his Chinese counterparts.

Interestingly, delegates at a recent financial summit in China agreed that Asia should reduce its dependence on dominant currencies like the US dollar and the Euro during trade settlements. The move, said the delegates, would promote the internationalisation of local tender. “In recent years, Asian economies have seen rapid growth in intra-regional investment and trade, a shift from the days when Asian nations used to depend largely on the West,” says Houng Lee, senior resident representative of the IMF in China.

As a result, capital mobility and improving settlement efficiency are big challenges for Asia that needs to avoid risks in exchange rate fluctuations. Realising its trading advantages over other nations, Beijing is pushing the new agenda for its currency, which was internationalised last July. This happened around the same time China announced administrative rules for cross-border renminbi currency settlement. The renminbi is the currency that existed in mainland China, while the yuan, which within the territory was equivalent to the renminbi, was the currency of exchange globally. Now that China wants to universalise renminbi, they expect to phase out the currencies of Macau and Hong Kong within the ‘middle kingdom’, while without, they want to establish the renminbi as a global tender and phase out the yuan.

Consider this one. The Texas Pacific Group (TPG), one of the world’s biggest private equity firms, is partnering with Shanghai to raise $735 million and create its first fund denominated entirely in this newly global Chinese currency.

TPG, which has about $57 billion in assets under management and began investing in China 15 years ago, said it was time to move to the renminbi. “Private equity is now a global business,” said co-founder Jim Coulter to Bloomberg.

By globalising the renminbi, China wants to phase out Hong Kong and Macau’s currencies first, and then the yuan
By globalising the renminbi, China wants to phase out Hong Kong and Macau’s currencies first, and then the yuan

The announcement comes at a time some of the world’s biggest private equity firms are scrambling to create local funds. The Blackstone Group and the Carlyle Group have announced plans to raise huge funds denominated in renminbi — a reflection of the growing importance of the Chinese currency and a sign that global funds are keen to tap China’s enormous wealth. And Beijing is happily encouraging the shift, hoping such investments will help strengthen the nation’s capital markets and bring more capital to private Chinese companies. The move is also aimed at listing Chinese companies in the New York and Hong Kong stock markets that remain out of bounds of Chinese regulators.

Analysts say China wants to strengthen its financial services and transform cities like Beijing and Shanghai into global financial centres that can compete with the markets of New York, Hong Kong, Tokyo and London.

It is a move everyone is taking notice of. For example, the RBI recently said it was evaluating the impact of China’s yuan move, on rupee exchange rate and trade and capital flows, and that it will take into account all factors before making a new move. “There are implications for exchange and capital movements across countries,” says deputy RBI Governor Subir Gokarn. Agrees Saumitra Chaudhuri, member, Planning Commission, who feels multiple currencies are needed in cross-border trade to avoid forex risks.

Beijing, which plays a significant role in Asia’s regional economy, should know. Cross-border settlement with renminbi — especially when the currency appreciates — will help reduce financial losses. For the record, Yunnan province is already pushing such settlements as part of a government pilot programme. “Countries neighbouring Yunnan trust renminbi and are using it in cross-border settlements,” Gong Fangxiong, general manager, JP Morgan (Asia-Pacific) told TEHELKA.

THERE ARE others who feel the move could work only if Beijing pushes what it claims are rational financial reforms to global expectations. “China’s concern over global trade imbalance is understood, but it needs to complete a certain phase of its economic reforms,” says Mushtaq Khan, chief economic adviser at the State Bank of Pakistan.

Beijing’s share of global exports grew from 3.6 percent in early 2000 to 10.7 percent this January, prompting fears of undervaluation of the yuan whose current appreciation against the US dollar is 22 percent. “China must internationalise the yuan, without disrupting manufacturing sectors. It should not create destabilising capital flows that could complicate yuan management,” Khan told TEHELKA.

Interestingly, one of China’s top bankers, agrees. Hu Xiaolian, deputy governor of the People’s Bank of China (PBOC), China’s central bank, argued in a recent series of speeches that a freer exchange rate would not only liberate Beijing’s monetary policy but also create thousands of jobs, by boosting their export industries and channeling investment to its service sector.

Hu has reasons to be worried. In the past two months, the yuan has barely budged, and on a trade-weighted basis, is 2.3 percent weaker than it was on 18 June. In July, China ran its biggest trade surplus since January 2009. Analysts say the gap between PBOC’s philosophy and its practice highlights divisions in Beijing’s economic policymaking. But the PBOC only administers the exchange-rate policy; it does not make it. That responsibility lies with the State Council, China’s cabinet. And to determine the yuan’s fate, it’s important that the two to have a strategic and economic dialogue.

This must happen soon, so as to drive monetary cooperation vital to Asia’s economy. “Asian currency integration can help foster sustained economic growth and financial stability, both locally and internationally,” says Zhao Xiaoyu, vicepresident of the Asian Development Bank. Xiaoyu calls it sub-regional cooperation, that is growing fast across Asia, driven by China and India. “Both are becoming important global centres within Asia, and one of the biggest impediments of growth is the region’s limited financial development. Clearly, future monetary and financial cooperation in Asia must be worked out at the national, regional and global levels.” No one is denying the need for a regional trade currency.

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