China Moving to Convertible Yuan

While our politicians pander to the economically ignorant with protectionist threats, the Chinese just slowly go about their business of eating our lunch by thinking long term. Chuck Schumer thinks he wants the Chinese to raise the value of the Yuan (renminbi) but he should be careful what he wishes for. The Chinese are moving toward making the Yuan convertible but they are doing it on their own schedule. As the Yuan (renminbi) becomes more acceptable, the dollar becomes less needed and therefore less valuable:

By Gerard Lyons

Published: April 27 2010 15:50 | Last updated: April 27 2010 15:50

There is a ticking time bomb under the dollar. When it explodes depends not just on the US economy but also on policy actions in Beijing and Washington. Over the last year the Chinese have undermined the dollar by the back-door, questioning it as a store of value and medium-of-exchange.

Although the Chinese are not advocating the renminbi as the alternative to the dollar this may be only a matter of time. One needs to focus on what the Chinese do, as well as listen to what they say. A key development is China’s encouragement of international use of the renminbi, although they prefer to call it invoicing.

This may be from a low starting point but one Chinese saying may be worth bearing in mind: “A march of 10,000 miles begins with one small step”. Early signs are promising.

China is encouraging exporters to invoice in the renminbi and is setting up systems to allow trade payments in renminbi. This make sense. China’s trade is soaring. New trade corridors may soon require new means of payment. When the Chinese and Brazilian Presidents met last year they agreed to use their own currencies to settle more of their bilateral trade, rather than invoicing in dollars. Although viewed as symbolic, it is a sign of things to come.

The crisis also saw China sign a host of bilateral currency swap agreements with countries ranging from Indonesia to Belarus and Argentina. China’s growing trade and financial links with the rest of the world will make the renminbi more acceptable.

Gradualism dictates the Chinese approach to most policy measures. The process is logical. Look at the theory, examine the pros and cons, debate the issue, implement slowly and observe. If the project works, roll it out. On that basis, there is more to come.

Since a pilot programme started in July 2009 the volume of international trade settled in the Chinese currency has totalled Rmb11.6bn ($1.7bn). Although only 0.1 per cent of Chinese trade in that time, it has gathered momentum. This has encouraged the authorities to expand the programme.

Renminbi invoicing has been restricted to 400 mainland companies in five cities: Shanghai, Shenzhen, Guangzhou, Dongguan and Zhuhai. It will soon widen to cover thousands of mainland companies and more provinces, including Heilongjiang in northeast China which has sought approval to settle trade with Russia in renminbi.

As the Yuan becomes more valuable and the dollar less so, Chinese become wealthier and Americans become poorer. One might question why a US politician would want to accelerate that process. Maybe Chuck Schumer and Lindsay Graham are just idiots.

 

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