China’s Quest to Take On the U.S. Dollar Has a Long Way to Go

The Chinese yuan makes the list of top 10 most traded denominations for the first time, but Beijing's currency reforms are still too tentative

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Reuters

Policymakers in Beijing must be feeling warm and fuzzy these days. For years, they have railed against the dominance of the U.S. dollar in global trade and finance, complaining that it leaves the world at the mercy of erratic Washington politics and questionable economic management. China’s leaders can only blame themselves for their heavy reliance on the dollar, but still, from Beijing’s perspective, a world in which China’s own currency — the renminbi — is a more potent force would be a more stable one for the country’s development.

Thus the recent news about how popular the yuan is becoming must be heartening. Earlier this year, a survey from the Bank for International Settlements showed that the renminbi entered the list of top 10 most traded currencies for the first time. And in early December, a report from financial-services firm SWIFT revealed that the renminbi had overtaken the euro as the second most used currency in global trade finance, with its share jumping from a mere 1.89% in January 2012 to a more respectable 8.66% in October.

But Beijing shouldn’t uncork the champagne bottles just yet. The same SWIFT report details just how far the renminbi still has to go to become a truly international currency. Nearly all the trade finance conducted in yuan was undertaken by businesses in China, Hong Kong and Singapore, showing that its use remains extremely limited. The dollar is the currency of choice in 81% of the world’s trade finance, according to the SWIFT study. Nor has the renminbi gained much stature among the world’s central bankers, who still prefer the dollar and euro. Central banks in countries as diverse as Chile, Nigeria and Malaysia have reported holding yuan in their portfolios, but its use as a reserve currency is overall infinitesimal.

The hurdle facing the renminbi is both simple and not simple. Despite China’s global clout in manufacturing and exports, in international finance it remains a bit player. That’s because the government still imposes strict barriers between China’s financial sector and capital markets and those of the rest of the world. Controls restrict how money flows in and out of the country. Foreign investors cannot freely invest in yuan-denominated assets. The value of the yuan is still heavily influenced by the government, and it is not permitted to trade freely. If global investors, bankers and businessmen are to have the confidence in the yuan necessary to elevate its status, China will have to clear these restrictions away and give more power to the market in determining the worth of the yuan and its flow in and out of the country.

That’s easier said than done. China’s policymakers have been talking up a storm for years about internationalizing the renminbi, but progress has been glacial. Still, over the past few weeks, the promises of reform have become bolder and more specific. In early December, they took some important steps when the People’s Bank of China, the country’s central bank, issued guidelines on experimental capital flows to take place in a new Shanghai free-trade zone (FTZ), launched in September.

New types of bank accounts will be permitted in the FTZ that can be used to move money more freely in and out of the international financial market. Foreign investors operating in the zone will be able to invest without the usual restrictions in the stock market in Shanghai, and Chinese will be better able to invest overseas. Calling the guidelines “bolder than expected,” HSBC economists Qu Hongbin and Ma Xiaoping asserted that they “suggest a marked acceleration in capital-account liberalization.”

Such steps are aimed at experimenting with the sort of open flows of money that could, when implemented on a national scale, help the renminbi become a major international currency. But there are clear limits to how far the central bank is willing to go. There appears to be little concrete movement on allowing the yuan to be valued in a more market-oriented fashion. It also appears that the zone will be walled off from the rest of China — so the experiments there don’t impact the wider economy. In other words, change will be slow, carefully monitored and confined to a certain group of individuals and institutions.

To a certain degree, that makes sense. Throwing open China’s insulated, inexperienced and ill-equipped financial sector to free capital flows and more foreign competition could be disastrous. But at the same time, going too slowly will keep Chinese banks, financial markets — and, yes, the renminbi — stunted and their international sway limited. Figuring out how quickly to proceed will be one of the biggest challenges facing China’s policymakers over the next decade. Until then, the renminbi’s dollar dreams will have to wait.

14 comments
SarahQWillis
SarahQWillis

Really interesting piece - this seems to very topical at the moment. As a Forex trader it makes for an interesting question as to when the Renminbi will become fully convertible and tradeable? You guys may be interested in reading this new analysis here - http://www.thestreet.com/story/1551733/1/will-the-chinese-renminbi-become-the-new-dollar.html#disqus_thread Although from more of a trader perspective it raises some interesting points. Another good read if you are interested in the potential of the Renminbi.

JamesErb
JamesErb

China's plan is to increase the global acceptance and usage of the Yuan while building it's gold reserves. They plan on having the next global currency...be it the Yuan or the Yuan as a major player, as gold backed.

Your making light of the Yuan international climb is dumbfounding. China went from 1.89% in January 2012 to 8.66% in December of 2013...in just 11 month's. If you do the math based on this growth, on a linear scale, they would overtake the US for number 1 in global trade usage in 2019...that's only five years away!


Putting China's Gold and Gold Imports into Prospective!
*China Gold Imports just through Hong Kong in 2013 = 1,272.7 Tons
*Global Gold Production Projected for 2013 = slightly less than 2012 which was 2,700 tons.We will use 2,700 tons for 2013 anyway

*Total China Gold Production for 2013 = 430 tons

*Total Gold Production for US, Canada, Australia and South Africa combined for 2013 = 799 Tons

*Total World Production of Gold Minus China's Gold Production = 2,270 Tons (2,700 - 430)
*China's Total Gold Consumption for 2013 = 1,702.70 tons (1,272.7 + 430)
*China's Gold Production has Increased 146% or 2.46 times since 1997.

*US Gold Production Peaked in 1998 and has decreased 36% since that time. Current level is 234 Tons
In Summary:
China Gold Imports equals 56% of Total Global Gold Produced outside of China in 2013. (1,272.7 / 2,270)
China Gold Consumption equals 63% of Total Global Gold Produced in 2013. (1,272.7 + 430 / 2,700)
China Consumed 2.13 times more Gold than was produced by the US, Canada, Australia, and South Africa combined in 2013. (1,272.7 + 430 / 799)
China Produced 53.8 % as much Gold as Produced by the US, Canada, Australia, and South Africa combined in 2013. (430 / 799)
China Produces 1.84 times as much Gold as the US

TAHKICT
TAHKICT

bitcoin will replace traditional currency...

cruzkit
cruzkit

The problem with China is China. The country is selling its soul to become a economic power-Yet at what cost?

Pollution, rampant corruption, and the country is aging far quicker than most thought possible. China will grow old before it grows rich. Add automation (robots), 3D printing and the internet and you will see that China get stuck and stay a 2nd world country regardless of how good or bad the dollar becomes. 

by78
by78

I hope it'll be a long way to go, but of course, the author assumes the U.S. economy will not collapse anytime soon.

ChinaLee
ChinaLee

While we wait for more reforms, the Chinese currency continues to appreciate against the U.S. dollar.

The Chinese currency has appreciated by 36% against the U.S. Dollar in the last eight years.

According to an U.S. Treasury report, annual inflation is higher in China than the United States and this has contributed another 10% effective Chinese Yuan appreciation against the U.S. Dollar.

In total, China's currency Yuan has appreciated 46% (ie. 36% from nominal currency appreciation and 10% from higher inflation) against the U.S. dollar since 2005.

----

Math:

In 2005, one Yuan was worth 12.09 cents. [1 dollar / 8.27 yuans = 12.09 cents per Yuan]

In 2013, one Yuan is worth 16.47 cents. [1 dollar / 6.07 yuans = 16.47 cents per Yuan]

Yuan appreciation = (16.47 cents – 12.09 cents) / 12.09 cents * 100 = 36% appreciation vs. U.S. dollar

outspoken
outspoken

keep   on  printing   more  $   and  things  will  be wonderful.

lpc1998
lpc1998

China has no interest to take on the dollar. She and other countries are running for cover as the US authority has the need to "print" the dollar massively. Countries all over the world are starting to use local currencies with their trade partners. Everyone would want to hold as little dollar as possible as it is a depreciating asset.

duduong
duduong

China's desire to see RMB used more widely does not come from selfish ambition; instead, it stems from the US' shameless abuse of its dollar privilege. The Fed has printed $4 trillion out of thin air over the past 5 years; this is equivalent to a theft from everyone who uses dollars for international trades. It was an American treasury secretary who once famously said, "the dollar is our currency, and YOUR problem!" As long as the US administration continues its exploitation of the rest of the world, the victims will naturally want to rid themselves of the shackle that is called the dollar.

jefforsythe9
jefforsythe9

Once again countries getting into bed financially with the largest human rights offender in the history of this planet. The brutal Chinese Communist Party practices torture, slavery, organ harvesting and murder in its attempted genocide of the tens of millions of innocent Falun Gong practitioners who live in China yet Western Governments are lined up to try to make a few filthy dollars any way possible.  The U.N. even gave Red China a seat this year on its Human Rights Council. Shameful.

SonTran
SonTran

@JamesErb  

Moron,


What are u talking about ? What do u mean Gold production ? Gold means NOTHING in today economics.U must be just out from jungle to comment such moronic idea.

Junk.Mail
Junk.Mail

@duduong

For what it is worth, I actually think it is primarily the US that wants RMB to decouple from the dollar, not China. Cannot disagree that the US money printing scheme is bad for the rest of the world, but it isn't quite as extreme as China's currency pegging scheme, which artificially props up China's export economy by making Chinese exports far cheaper than they should be. The US would love to see the RMB rise to its market value, but China doesn't want that because its economy will go virtually cold overnight. To make it all work China has to hoard dollars instead of releasing them into the population. So what do they expect when the US devalues? China is just a pot calling the kettle black on this one.

duduong
duduong

@jefforsythe9

Most of the world considers the title of "the largest human rights offender" as belonging to the US, a country founded on genocide and land theft. It killed hundreds of thousands of innocent civilians overseas in the past decade alone, and every year murders its own fellow citizens at 60 times the rate of China.

Falun Gong is an evil cult. China did the right thing to ban it, or more people will fall into its trap and suffer. When ATF blasted into Sect Davidian's compound, law-abiding citizens applauded; they should do the same to the law enforcement effort in China.

jefforsythe9
jefforsythe9

Your comment shows why my comments are very important. I agree that America has committed its share of human rights violations and most people would agree as well but most people are not aware of the inhumane atrocities that the blood-thirsty Chinese Communist Party has been and is still committing since 1949. The brutal CCP has murdered over fifty million of its own people and since 1999, has been torturing, enslaving, organ harvesting and murdering the tens of million of innocent gentle Falun Gong practitioners who live in Red China. One doctor, employed by the CCP, confessed to removing the corneas from two thousand living human beings, for sale for transplanting. The CCP, because of jealousy, has brainwashed the entire World into believing that Falun Gong is some kind of evil Cult. Just the opposite. It is a gentle heart and mind cultivation practice which believes in truthfulness, goodness and tolerance. Nothing is evil about that. Thank you for your consideration.