China’s Plan to Make the Yuan the World’s Go-To Currency
bloomberg.com
bloomberg.com
Imagine asking yourself the same thing about the US Dollar, Yen, even the Australian dollar, Pound over their entire timespan as a floated exchange rate. They've never been any illusions about it, it's WYSIWYG. You can't freely move CNY out of China to start with. Imagine having your savings, or backing your business on such a currency.
I guess eventually it's possible, say after more than 3-5 decades of proof that its a stable currency
Specifically, since 1983, it has been pegged to the current rate.
However, after the initial deprecation last year, I saw the writing on the wall, and got the money out. It wasn't easy, but it wasn't impossible either. Chinese citizens can exchange $50K USD a year, which doesn't seem to be going away, while foreigners can exchange what they earn in China...with proper tax documentation (it took a few weeks to complete my initial forex).
Investment opportunities in China really suck! You have the bubbly real estate market, the insider trader stock market, and foreigners are actually very restricted from doing either of both anyways (we can't buy stocks, acquiring property is tricky, not that I would want to do either). The only reason I kept my money in China was because of the appreciation, investments also weren't doing well at the time.
I can see the RMB being a serious currency..it isn't that messed up compared to say the Venezuelan Bolivar, or many currencies in SE Asia or even the Indian Rupee. Heck, the Japanese Yen is even more volatile, and I would have lost big time if I made bets on the pound or the Australian dollar. But the lack of convertibility, even if only partial, is a big show stopper. They really should make more effort to that, and they seem to have stalled for the last 10 years while walking backwards from the reforms of the early/mid 00's.
Price discovery is extremely important, even if it comes with volatility. It would be comforting to know that China could reinvest its trade surplus back into the US, which it's not doing well since it's not incentivised to do so, solely investing in Treasury's. This is why we're in a recession, because this cash is a drag on consumption, and its stuck in Treasuries.
The money isn't really the government's...it needs to be somewhat liquid and ready to use elsewhere. Treasuries are fairly liquid (you can't redeem them early, but you can always trade them) and are not very risky (though these days they often have effective negative interest rates).
Earlier this year, my wife and I were in China helping her mom close an old bank account to move the money to Hong Kong (she's been an HK permanent resident for over a decade). It was almost $10k USD worth. The easiest option was to get it all in cash and take it back to Hong Kong. The largest RMB note is the ¥100, which is about $15 USD. Our pockets were stuffed with hundreds of notes. It felt very awkward. Even though it was legitimately our money, I was afraid at any moment I'd be pulled aside and charged with some kind of crime.
So yeah, I don't see RMB as very practical when the largest note available is equivalent to $15. Pretty much necessitates that every moderately large transaction will go through a bank, under the watchful eye of the Chinese government. I can't see many foreigners being interested in that kind of arrangement.
The Chinese border police don't look into money laundering or structuring that much. Much easier to go after the iPhones and milk powder.
I see no reason any central bank would want to swap out their Treasury bonds with Chinese government bonds (Treasury bonds are already too illiquid in times of crises, which is when we really need it), or any reason either consumers or merchants would want to start using the Yuan, other than to pay for imports from China.
It's not as simple as just being in existence. There's alot of 'trust' to it too, Countries could easily diversify against the USD on their reserve baskets. The CNY isn't a significant proportion of any basket because of the lack of trust & free liquidity with it.
All in all, full employment matters more than currency perception overseas, at least if its done using free market forces, such as the purchase of bonds in the secondary market for QE.
>It's also that the US doesn't play games with it's currency,
Let's call a spade a spade. Sure, the US wasn't directly affecting rates. But a the time the financial world was burning, and people were flocking to (and holding) the Dollar for shelter. QE 1 2 and 3 were 600B, 600B and a monthly 85B. That much money put into the market keeps rates down simply because of supply influx.
There's more vexing things that would affect this perception such as the credit rating, especially with so much debt. Yet History says the managers in government, and the Fed are good at their jobs. So even despite the QE perception on money printing the issues with this haven't been much of an issue, or it would have shown up with a weaker dollar/diversification away from USD on central bank's balance sheets
There is certainly an enormous inflation of the money supply but you don't see and feel it because it is sitting idly in bank accounts or is invested in bonds, the stock market or real estate. (here we actually see inflation)
Once the holders of this money decide to move it out of these asset classes you are going to see inflation, because all of this money created by the FED does actually exist now.
Of M0 or 'narrow' money, yes. But the broader money supply was shrinking as loans defaulted. Arguably QE was an attempt to equalise the total (broad) money supply, and price inflation can be expected if QE money is not withdrawn as new loans are made, or rather, as the total amount of debt increases, creating broad money through fractional reserve banking.
To reverse the gov must buy the bond back with money from general taxation, on doing so the bond is redeemed and destroyed, and the central bank erases the money it received back in tandem with the bond.
Basically it's all smoke and mirrors, the various obligations (to redeem the bond, to do so with real money, etc. are all legal bindings and mechanisms that can be signed away with sufficient political support, thus reducing the whole process to good old fashioned money printing).
Which is never going to happen. (at least in this political system) Currently Western governments can barely keep things running by increasing their debt at an almost exponential rate.
But this is already a normal part of the process. The government rolls over its debt as bonds mature, so the Fed can just take the money when the bond matures and not buy new bonds. That would force the government to borrow existing money from individuals and other countries instead of creating new money through the Fed, effectively taking that cash out of circulation at the cost of an increase in interest rates.
Also, the Fed bought corporate bonds under QE, so this isn't just a question of the government printing money to cover budget shortfalls.
Here is a graph:
Of course these people are going to diversify because they can see the writing on the wall. So what are they going to invest in? Tangible assets like real estate. Here in the EU real estate has basically doubled in price during the last 4 years and people complain that they can't afford the rent anymore, yet the governments have been successful in convincing the majority that it's actually these evil Capitalists who are the cause for this.
But I am going to make my case that governments should stop manipulating the markets whenever I want because it hurts the majority. (not me though, I've actually profited greatly from this. I'd still prefer it to be fair for everyone because I do not fear competition - competition actually gives me great pleasure whether I win or lose)
People have this idea that with QE officially over the Fed's balance sheet will shrink over time, but it's not true. Bonds that were purchased under QE are replaced with new bonds as they mature, so it's effectively printed money.
This is just the kind of fiddling you don't want to see when you're holding currency.
It's nothing new in fact its near bog standard. This process is done with the lower maturity instruments when interest rates are higher by matching it up to the federal funds rate by purchasing or selling them & rolling them over in the exact same fashion (with this 'printed'/reserve money as well). It's just this is done using longer term assets instead.
That's the theory. I doubt it will ever actually happen, though, since whoever makes that decision will be blamed for any poor economic performance that follows.
I would never consider buying Yuan over Dollars but I simply cannot agree with this statement. What the FED has been doing since 2008 and the ECB with the Euro is a massive experiment in gaming the markets which could possibly lead to catastrophic event. At least in the case of the EU I have no doubt that this will happen.
Today when you buy commodities or currencies your success or failure is not determined anymore by what the market believes is valuable or not, but instead by what governments and bureaucrats have decided should be valuable or what should go down in value. I am fundamentally opposed to this because it creates a lot of bad behaviour, corruption and governments ending up owning previously privately held property and companies.
It is not inconceivable that we could see various Western governments ending up owning most of the property in their countries in the next decades. That'd certainly be a creative way to implement Communism, I'll give them that.
> It's not as simple as just being in existence. There's
> alot of 'trust' to it too, Countries could easily
> diversify against the USD on their reserve baskets. The
> CNY isn't a significant proportion of any basket
> because of the lack of trust & free liquidity with it.
Central banks hold bonds as assets on their balance sheet, not medium of exchange. These assets are what the medium of exchange is issued against in the first place. I'm arguing that it is not possible for foreign central banks to just choose to switch out US Treasury bonds with Chinese government bonds, because the Chinese bonds have terrible liquidity -- and bond liquidity isn't particularly good in times of crisis to begin with.
Say I buy a container of iron ore from Australia from the US, the process needs money to flow to Australia. In this flow the Federal Reserve would provide to the Reserve Bank of Australia (RBA) some of the assets in this currency basket to back its claim, it simply says the RBA is owed that (and subsequently the RBA can use that against USD trade, or use that against some other trading partner).
So this way that the person I buy ore from in Australia has his credit in his account backed by something intrinsic (owed to him by the RBA, owed to the RBA by the Fed). No money has really flowed between countries, just the Fed owes the RBA assets in this currency basket as a result.
This communication is done using the Bank for International Settlements which allows these reserves to be exchanged between other countries when they trade amongst each other. Hence it's important the basket contain assets that are universally acceptable and can store value. It used to be Special Drawing Rights, and before that Gold.
The Federal Reserve's gold hoard is also amongst this basket. The terminology remains from the basic function of exchange accounting under the Bretton woods system, in principle using fiat instead of Gold. This method was devised to avoid countries having to ship gold to each other. They could simply owe it to another Central Bank and trade against that.
The bonds are stored in a different form as part of their monetary policy, the functions in this sort of basket is part of the Fed's function with international settlements.
Source: looked on in dismay as the (legacy) treasury trading system at an investment keeled over and died the day after Lehman ate shit.
It's convertible into (crude) oil today ("petro dollars"), although obviously, that varies quite a bit in price (technically, so does the price of an ounce of gold).
Oil being traded primarily in USD doesn't make the USD backed by oil, just as the dollar is no longer backed by gold even though gold is primarily traded in dollars.
> Since the agreements of 1971 and 1973, OPEC oil is exclusively quoted in US dollars. This created a permanent demand for dollars on the international exchange markets.[0]
Sort of. The US gov committed itself legally to redeeming gold at a fixed stated price. It was an untenable position since by 1971 there wasn't anywhere near enough gold to back all of the dollars in existence. A floating gold price would have been higher than the legally defined price, and this created an arbitrage situation whereby one could exchange dollars for gold at the legally defined price, sell gold on an open market for more money, buy dollars, and repeat. This arrangement ends when the US gov runs out of gold or goes bust... or figures out beforehand what the end states are and annuls the law in question, which is what Nixon did.
The root of the problem was the increase in dollar money supply without a matched increase in gold reserves, noting that you only have to match narrow (M0) money, rather than broad money from fractional reserve banking (i.e. loans). Why? because most broad money is inaccessible, it's a number in a ledger, to get actual dollars to redeem you have to withdraw that money, and to do that at scale requires banks to claw back loaned money, thus reducing broad money supply right to back nothing, leaving just M0 money (i.e. dollars created directly by the central bank).
(I don't know enough about currency trade.)
https://www.bloomberg.com/news/articles/2015-11-03/china-dev...
For the same reason BNP Paribas paid the record 9 bil USD fine to US, even though it is a French bank.
What the regulation does, is to protect against attack on the currency on the open market, like 1997 SE Asia one. Obviously Chinese are currently holding an opinion, that this protection is currently worth more than uncontrolled investment.
I doubt it's that simple. Does that Chinese currency law have any force in the UK?
I'm by no means knowledgeable about this, but I'd imagine it's more like any bank that offers yuan accounts in the UK would necessarily need to be able to do business in China to make the accounts useful, subjecting it to Chinese law. Since the Chinese government forbids the latter, the former is loses its appeal. So a London bank could take yuan if it had no Chinese presence, but it wouldn't want to.
When I spend a Dollar, the business that gets it puts it in a bank account. That Dollar can (theoretically) be taken to the issuing bank, in this case the Fed, by the business' bank, in order to get something of value.
To enforce the trading of Yuan, the Chinese we do not value Yuan held by in foreign accounts (or in the case of the "international" Yuan, it's value is restricted). So now those pieces of paper you have with Chinese lettering (or that account valued in Yuan) has nobody that gives it value... it's worthless.
Think about if the dollar (or the euro) was worth more or less depending on where you were...
That's not equivalent to saying: Yuan may become a "world go-to currency" if China manages to remove many communist-style controls from it and demonstrates their intent to make it free-to-trade by allowing Yuan free-to-trade for a continuous period of 50 years at the least.
The article doesn't say this with such a detailed clarification and required qualifications to claims. Hence it seems like a propaganda coming from a communist dictatorship rather than a well researched article.
1.) Yuan is being printed massively (it hit a credit-to-gdp ratio of 30 to 1 http://www.bbc.com/news/business-37403363)
2.) it is a non-fully-convertible currency
3.) there are severe restrictions for yuan to move out of the country due to capital controls. max $50/year. also, $15k/year withdraw restrictions (http://money.cnn.com/2015/09/30/news/china-overseas-atm-cash...)
4.) no one is required to use yuan for trade.
5.) nobody wants yuan outside China. people in China are desperate to exchange yuan for other things inside China.
All the conditions are there for hyperinflation to occur. Might happen early next year when europe and China both likely reject China's market economy status, and starts imposing tariff on Chinese imports heavily.
What does that mean?
http://www.reuters.com/article/us-china-usa-trade-idUSKCN0ZU...
http://thediplomat.com/2016/07/market-economy-status-for-chi...
The argument is essentially that China's economy doesn't function as a proper market economy. That too much of its economy is directly governed by State controlled or owned corporations. That prices in its economy don't function enough based on market influences. An example of this would be their vast dumping of steel and some other industrial products, while their government continues to directly subsidize the dramatic over-production despite large losses in the steel industry.
Which is true. I really hope this happens, it's time for China to start playing by the rules of a real market economy or lose access to the global market. We should not tolerate China subsidizing their industry, at the expense of other industrial countries.
However, this is true of any country.
Fortunately for China, at least in production capacity, China has no worry here.
Come to think of it, I believe the Chinese people have come to the same conclusion?
One noticeable difference to add is Japan and the EU are US military dependents and therefore by logic also US economic dependents. The Chinese are not. Not sure how that would value in calculations, but it is a significant factor.
Debt to GDP is 282% and on a trajectory to hit 500% if action is not soon taken. There is no long term upside if debt is not reduced.
> China's abilities to counter US attempts to devalue and destabilize their currency
China's exchange rate is set by China alone. If there is destabilization taking place it is capital fleeing China in anticipation of a debt crash and asset bubble implosion.
> the collapse of the Yen spurned by American economic manipulation.
The Yen is suffering from a demographic crisis where younger workers are far outnumbered by an aging population. This is problem in a number of countries.
Hopefully you're being paid in USD to post this propaganda.
As for currency manipulation, did you conveniently forget that the US bailed out the banks to the tune of trillions with no jail times except for one lower end employee? Their own economic manipulations and fraud created a bubble that collapsed the Euro, strengthening the dollar.
Long term perspective is still quite good, and although you want to sputter your freedom eagle bullshit at anything you think is non US, it remains an attractive invest and forget investment option.
In short, US debt and money supply cannot keep pace with global asset growth. One or the other must (and is) giving way.
The problem with that is that a LOT of Chinese people cannot buy a house. They simply don't have the liquid money or the same access to credit that American's do (for better or for worse).
So what they have now is a glut of supply in their housing market (built upon credit), with a lack of demand. And really there is no way for the Chinese government to create that demand. They can't go the QE route because your currency is restricted. You don't have diversified industry to kickstart. Steel is down. And you're already saddled with both domestic and foreign debt.
I'm no economist, but the future isn't that bright for China. Imo a Chinese collapse could be worst than an American one.
We will live in interesting times, for sure.
But doesn't the federal reserve consider the value of the dollar against other currencies in its rate making decisions?
Yes, there are different degrees of currency manipulation.