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Further Internationalization of the Yuan
TND Guest Contributor: Paul-Martin Foss |
While most of the world has been focused on yet another Fed meeting, they have ignored more and more yuan-related news coming out of China. The past month has been full of news of the Chinese government increasingly liberalizing and internationalizing the yuan, its interventions to manage the currency’s value notwithstanding. China also has been strengthening its ties with the United Kingdom. As these business and financial ties grow closer, might that also have effects on the US-UK “special relationship” in security policy? It would certainly behoove American officials to keep a cautious eye on those developments. We highlight and analyze some of the most important yuan-related developments below.
China Launch of Renminbi Payments System Reflects SWIFT Spying Concerns
Money is important, but so are payment systems. All the money in the world won’t do you any good unless you can actually use it to buy things. And because large cash payments are unwieldy and highly scrutinized today, most large transactions are going to be handled through banks. You’ll either write a check on your bank account, or use a bank wire transfer, or pay by credit card that you’ll eventually pay off at the end of the payment period. You don’t see the back end, but behind the scenes banks are transferring money to each other to make those transactions occur.
They do that by maintaining correspondent accounts with other banks, and sending instructions to move money around accounts. The dominant method of doing that today isthrough the SWIFT system. If you’re an American, unless you’ve lived abroad, received a payment from overseas, or have had to wire money to a foreign country, chances are that you haven’t ever heard of SWIFT. But SWIFT is an incredibly important organization, the backbone of international interbank communication. Without access to SWIFT, a bank is unable to access the world financial system. It is perhaps because of that importance that China is now trying to establish its own payments and clearing system.
Because SWIFT is based in Belgium, it is susceptible to pressure from Western governments, particularly the US and UK. Western governments have even threatened to block Russia’s access to SWIFT, in response to Russia’s annexation of Crimea. The Russian response was swift and forceful: any attempt to block Russia from SWIFT would result in Russian retaliation. It is no surprise, then, that with SWIFT being treated as a weapon by the United States and EU that China would seek to form its own payments system to compete with and eventually eliminate dependence on SWIFT. Adding urgency to that is the fact that the US National Security Agency is widely reported to spy on SWIFT transactions. Developing an alternative to SWIFT that not only serves the needs of Chinese banks and foreign businesses dealing with China but that is also outside the NSA’s prying eyes could aid in the adoption of the Chinese system.
Yuan Third Most-Traded Currency on EBS Platform; Fourth on SWIFT (Reuters)
The Yuan continues to grow in importance as the Chinese government slowly relinquishes control and liberalizes the currency. As China’s economy continues to grow, the yuan will play an ever more important role in international trade. While it still has a ways to catch up to the dollar, that may only be a matter of time.
China Poised to Issue Sovereign Debt in Renminbi in London
China is also expanding its foreign issuance of yuan-denominated debt, choosing London as its center for such issuances. London is a key city in exposing the yuan to international markets, and China continues to tie itself to the UK financial center. Bank of China launched a bond index and a currency center in London, and the Bank of England recently renewed and expanded its swap lines with the People’s Bank of China. Because the yuan is still relatively new to international markets, many investors are hesitant to purchase yuan-denominated assets. But the more the Chinese government can expose foreign investors to the yuan and yuan-denominated assets, the easier it will be in the future to use the yuan in international trade.
Yuan to Be Included in SDR Currency Basket
Special Drawing Rights, or SDRs, are the unit of account used internally by the International Monetary Fund. The value of the SDR is based on a weighted currency basket that currently consists of the US dollar, the UK pound, the euro, and the Japanese yen. It appears that the yuan will now be included in that basket. Not only is it a feather in China’s cap to be included as one of the currencies in the basket, it is also expected to result in an increased demand for yuan on the part of foreign exchange reserve-holders. Once again, the more people who hold yuan, the easier it is to use in international trade. Network effects are very important to the adoption of currencies.
China Adds More Gold to Reserves in September
China continues to add to its gold reserves, which many believe could be setting the stage for a gold-backed yuan. Like much of the economic data coming out of China, Chinese gold reserve figures are widely assumed to be under-reported. However, China is the world’s top gold producer and top gold consumer. China’s gold imports continue to rise, and Chinese influence in gold markets continues to grow stronger.
The Chinese government has taken huge steps in the past few years to internationalize the yuan. For too long, the United States government has been complacent about the dollar’s status as the world’s reserve currency, treating it as a given and forcing the rest of the world to deal with whatever the US wants to give them. China’s liberalization of the yuan is pushing back against that, putting the US on notice that there is a new kid on the block. Perhaps that is why the US Treasury has pulled back on its usually harsh treatment of theChinese government’s currency policies. Perhaps the US government finally realizes that displeasure with one-sided American economic policies and a constantly weakening and depreciating dollar threatens the dollar’s dominant status. But absent monetary reform and concrete efforts to maintain the dollar as the world’s reserve currency, is it already too late to stop the dollar’s decline and the yuan’s ascendancy?
Image: Wikipedia
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About Paul-Martin Foss:
Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.
Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.
As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.
Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.
This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”
Source: http://thenewsdoctors.com/further-internationalization-of-the-yuan/
