Yuan As Reserve Currency – Really?
Yuan As Reserve Currency – Really? by Rory – The Daily Coin
I was listening to a video earlier this morning about China Rapidly Moving Toward Reserve Currency! These 60+ Countries Sign Agreement! and having known for the past several years how China has stated, publicly and through the IMF, she would like to see an end to the reverse currency system and “the dangers of relying on one nation’s currency for international payments” I found this video to be a little disturbing. It seems there should have been a little more thought and research conducted prior to producing such an article.
By simply reviewing the facts, as published in the supporting article for the video one quickly learns something is out of balance.
Governor of Chinese central bank proposes new monetary system controlled by IMF
China has called for the replacement of the dollar as the main global reserve currency, in a display of its growing assertiveness ahead of the G20 summit in London.
The bold proposal from the governor of the Chinese central bank – who calls for a new system controlled by the International Monetary Fund – reflects the willingness of emerging powers to press their case as the economic crisis overturns existing relationships and highlights the failings of the current financial system. Source
According to the article sited for the basis of the video in question the RMB/yuan lost more than 30% of it’s market share year over year between 2015 and 2016. How can one move into “reserve currency” status by moving backwards in market share?
“Renminbi internationalization will play a more active role in serving the real economy and facilitating trade and investment.”
The report, however, said the value of trade deals settled in the renminbi, fell by 35.5 percent in 2016 from the previous year.
Renminbi settlement accounted for 16.9 percent of China’s total goods trade last year, while the proportion was 22.6 percent in 2015, 20 percent in 2014, and close to zero in 2009.
The currency fell by 6.5 percent against the dollar in 2016 – the biggest annual drop since 1994, but gained about 5 percent this year due to dollar weakness and tighter controls on capital outflows. Source
Not sure what the video producer is looking at but if we simply peel back the first layer we see the exact opposite of what is so gleefully reported.
Somehow we doubt it, especially since as the report itself admitted, the value of trade deals settled in the renminbi fell by 35.5% in 2016 from the previous year. Renminbi settlement accounted for 16.9% of China’s total goods trade last year, while the proportion was 22.6% in 2015, 20% in 2014, and close to zero in 2009. The currency fell by 6.5% against the dollar in 2016 – the biggest annual drop since 1994, but gained about 5% this year due to dollar weakness and tighter controls on capital outflows.
And speaking of capital flight, even though the PBOC reported that in September official central bank reserves rose by $17 billion to $3.109 tn (largely due to valuation effects), according to the latest SAFE data released overnight, after the first, and only month of inflows in three years, outflows have again returned for a total of $7bn in September (vs. net inflows of +US$9bn in Aug), in light of the recently relaxed FX forward rule (recall “Yuan Tumbles After Beijing Gives Speculators Green Light To Short The Currency” from September 8)
Separately, in a conference held on the sidelines of the Party Congress, Governor Zhou downplayed the pace of FX and outflow liberalization going forward. He said that the transition to CNY free convertibility is a long-term process; and that CNY band widening would signal more FX reform in future, but this is currently not a policy focus. In the near term, the authorities may continue to use a combination of daily guidance (via the fixing’s countercyclical factor) and occasional reinforcing FX intervention to manage the CNY, in our view.
In other words, capital controls are here to stay, and the moment outflows go back to double digit territory, the PBOC will unleash all hell against the Yuan short all over again. Source
I’m not the sharpest tool in the shed, but that doesn’t really sound like “reserve currency” material to me. If the people that are forced to use the currency are dumping it as quickly as possible, trade settlement is moving to the downside – in a big way and the People’s Bank of China – the owner of the currency – is threatening “all hell” towards said currency. Well, that sounds like a recipe for disaster, not a recipe for growth. Is this why Canada recently added a 15% total value tax to real estate for foreign investments? What percentage of the Canadian real estate market accounted for the total internationalization of yuan in 2015 and 2016?
No, the renminbi/yuan is not “rapidly” moving towards “reserve currency” status and according to a quick search or two we see that China is simply not interested in having a single currency or a single nation with that responsibility/privilege. What China wants is the SDR for global trade settlement that is measured against the IMF basket of currencies – this is what China has stated on numerous occasions.