Cashed up and ready to go?


04 Nov 2011
Week in China

"When out of doors, never show your silver" (出门不露白) is an old Chinese adage, urging cautious display of wealth and fortune.

Until the last year or so that has also held true for China's policy for its currency, the renminbi.

In fact, for years the renminbi has been a virtual irrelevance beyond China's borders. Ring-fenced and remote, it has played almost no role in global trade, finance or investment.

Here's a quick test. Most of us will recognise an American one-dollar bill almost instantly, with George Washington on one side and the Great Seal of the United States on the other. But how many could pick out a Chinese note at the same speed (and no points for guessing that Mao Zedong makes an appearance on most of them)?

China is now seeking to "go out" to establish itself more in the world.

Yet the renminbi's days on the currency sidelines look numbered, as Chinese policy starts to push for its wider usage overseas.

Why is this happening? Primarily because of what HSBC describes as China's "gravitational pull" across the global economy. As China's share of global trade and investment grows – and with financial markets increasingly looking at events in China for more of their cues – it is now a major anomaly that the renminbi should be such a minnow for cross-border payment, as an investment currency, and as a store of value in bank deposits and government reserves.

Economic and financial imperatives mean that this will change.

How much support for internationalising RMB?

Did China's top banker really wrongfoot his colleagues with his proposals on renminbi reform?

That was the speculation from Bob Davis in the Wall Street Journal this summer. The hunch was that – back in early 2009 – Zhou Xiaochuan played the patriotic card to speed up currency reform, making worldwide headlines with a series of speeches on global financial change. The message was that the international financial system was in desperate need of an overhaul, and that China would be taking on much more of a role to see that it happened.

Although Zhou didn't mention the US dollar directly (talking instead about a switch into the Special Drawing Rights programme run by the IMF as a reserve currency) his message seemed clear enough. He was blaming an over-reliance on the dollar for the financial crisis. Implicitly, that meant China wanted more say, at American expense.

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There is also national psychology at work. After years of observing Deng Xiaoping's dictum that it should "hide its brightness and cherish obscurity", China's mood is becoming more expansive. It is now seeking to "go out" to establish itself more in the world.

As a trend this is visible in the Chinese buying of overseas assets, or the push to see domestic brands win over foreign consumers. More broadly, the impulse is reflected in the hordes of Chinese tourists now starting to travel overseas, and even Chinese sporting champions succeeding on the global stage (think Li Na, the female tennis star who won the French Open this year).

So why not something similar for the currency, traditionally a bellwether for a nation's vitality and influence?

Talk of China's own 'rise' began long before any mention of something similar for the renminbi. But it now seems impossible that the two narratives will not converge. In fact, there are already those who regard the renminbi's rise as inevitable, and very much a function of China's newfound vigour.

Yet there is also a contrasting view: that the push for a more global renminbi indicates weakness as much as it does strength.

This perspective characterises China more as a hostage to the international financial system, rather than its aspiring master. Trapped in a US dollar world, Chinese policymakers have hatched the renminbi plan as an escape route.

The language is too dramatic. But it does reflect an understanding that much of China's economic future seems to have become too intertwined with the fortunes of the US dollar. In many cases it is almost an overdependence, especially in the dollar's dominance of international trade, or its looming presence in China's foreign exchange reserves.

Two recent examples will have reinforced that view in Beijing.

The first – from the financial crisis of 2008/9 – was the drying up of dollar based credit around the world. In China, exporters were hard hit, as orders began to seize up. So the People's Bank of China stepped in with stopgap financing through renminbi swaps with central banks from various emerging markets.

Trade partnerships survived the scare. Born in moments of crisis, similar facilities have now been extended to other countries, as China seeks to chart a more independent path in trade credit and settlement.

The push for a more global renminbi indicates weakness as much as it does strength.

The second example is even more recent, coming (again) in the wake of the financial crisis.

This time the problem was a different one: a glut rather than a shortage of US currency. The context is China's dollar-denominated foreign reserves (about two thirds of the $3.2 trillion held in reserves in total, analysts think). Beijing is increasingly anxious about their decline in value, courtesy of Washington's fiscal deficits and its policy of quantitative easing.

So just two examples of why China wants to push for wider acceptance of the yuan: to reduce risks and costs for its vast export industry; and to support diversification of the national balance sheet, even to a point at which the renminbi itself might feature in other foreign reserves worldwide.

Of course, it was China's own choice to amass its reserves in dollars, as well as to stop its currency from circulating further afield. Both policies have been fundamental in underpinning 30 years of growth. But the Chinese leadership is now inching towards a new growth plan, with domestic consumption playing a greater role. The objective is to reduce reliance on export surpluses and government investment in the same way that China wants to shift away from its overreliance on the dollar.

And again, internationalising the renminbi is part of the plan.

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Mulberry money

Did you know the first banknote was 'made in China'? Manufactured from mulberry bark and slightly larger than a sheet of A4, the note was invented by the Ming Dynasty around 1375.

The Chinese characters on the woodblock-printed sheet state that it is designed "to circulate forever".

The renminbi – which means 'people's currency' – is a much more recent creation, from June 1949. For years, it played little part on the international scene.

One mundane issue is how to render it typographically. Go shopping in China, and you will see prices displayed with the symbol ¥. But that is the same identifier that has long been used for Japan's own currency, the yen. So outside Chinese borders it is more often referred to as RMB or CNY.

Why have two different symbols? Again, it relates to common usage. Western newspapers will sometimes talk about the "yuan" in currency terms. But people talk about the renminbi and yuan to the way the British talk about sterling and the "pound".

A Chinese would never walk into a shop and ask how many renminbi an item was; rather how many yuan. Just as a British shopper would always quote prices in pounds (no one in the UK, would say "I paid 15 sterling for that bottle of wine"). Renminbi, then, is more a political term, yuan for everyday usage.

In fact, the term "yuan" goes back to the Chinese word for dollar - the silver coin, usually minted in the Spanish empire, that was used by foreign merchants to buy Chinese silk and porcelain for centuries.

Adding further to the confusion, the Chinese themselves will often talk of their bank notes as "kuai" (literally, 'pieces of'), also used historically to refer to coins made of silver or copper.