Daily Bulletin

The Conversation

  • Written by Hui Feng, Future Fellow, Griffith Asia Institute and Centre for Governance and Public Policy, Griffith University

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 Understanding China’s Influence.

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.

The yuan (or renminbi, RMB) was recently included 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 estimates 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.

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.

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.

image People’s Bank of China Governer Zhou Xiaochuan and US Treasury Secretary Jacob Lew are pictured at the annual meetings of the IMF and World Bank Group soon after the yuan’s inclusion in the IMF’s basket of reserve currencies. James Lawler Duggan/Reuters

The yuan has become stronger in the global scene as China becomes the largest trader and the second largest economy in the world.

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.

Relegation of the yuan lower down the priority list

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.

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.

The 2016 IMF review of the Chinese economy 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”.

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 the stock market crash last year.

So it’s not surprising to see that, although the government ensures stability of the yuan’s value, it has devalued by more than 1% after the SDR inclusion, approaching a new low in almost six years.

The future of the yuan

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.

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.

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.

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.

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.

The reforms have to go on. The yuan must serve the people before conquering the world.

Authors: Hui Feng, Future Fellow, Griffith Asia Institute and Centre for Governance and Public Policy, Griffith University

Read more http://theconversation.com/chinas-currency-needs-reform-at-home-before-gaining-more-traction-internationally-66915

INTERWEBS DIGITAL AGENCY

The Conversation

Politics

NATIONAL COVID-19 COORDINATION COMMISSION

Today I announce the creation of a new National COVID-19 Coordination Commission (NCCC) that will coordinate advice to the Australian Government on actions to anticipate and mitigate the economic ...

Scott Morrison - avatar Scott Morrison

Prime Minister's interview with Alan Jones

ALAN JONES: Prime Minister, good morning.    PRIME MINISTER: Good morning, Alan.   JONES: Prime Minister, there are lots of ups and downs in your job, but you couldn't be anything but disappointed...

Scott Morrison and Alan Jones - avatar Scott Morrison and Alan Jones

Minister Littleproud Chris Kenny interview

Chris Kenny Sky Interview   CHRIS KENNY: Now as we speak Federal Cabinet is meeting yet again considering more measures on the economy and to prevent the spread of this pandemic. So just before th...

Daily Bulletin - avatar Daily Bulletin

Business News

Choosing a Media Agency in Sydney

Famously known as the Emerald City, Sydney is a vibrant coastal metropolis offering great business opportunities. Sydney is home to an influential startup culture. Having 35% of the startups in Aust...

Sarah Williams - avatar Sarah Williams

How to lead remote teams during COVID-19

The spread of COVID-2019 has led to travel restrictions, school closures, and cities around the world moving towards lockdowns. Amid these new conditions, most of us still need to continue our day...

Seven Communications - avatar Seven Communications

Adina urges support of small businesses with reminder that there is no better feeling than Australian made

With international manufacturing markets being thrown into uncertainty due to the COVID-19 pandemic, General Manager of Adina Watches, Grant Menzies, believes there has never been a better time to s...

Red Havas - avatar Red Havas

ShowPo



News Company Media Core

Content & Technology Connecting Global Audiences

More Information - Less Opinion