[Marxism] Soaring use of Chinese yuan to settle trades reflects its rapid economic rise
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Tue Sep 10 07:26:01 MDT 2013
Trading in yuan has tripled in the past three years, the sharpest increase in a global currency market which has itself grown at nearly the same pace. The steadily appreciating yuan has encouraged its use by Chinese exporters and their overseas customers looking to escape transaction costs and foreign exchange currency risk. The use of other developing nation currencies like the Indian rupee, South African rand, and Brazilian real have also risen over the past decade but not as strikingly, and have recently taken a tumble on news the Federal Reserve will be reducing its support of the US bond market. China's more highly regulated economy has prevented similar destabilizing inflows and outflows of hot money tied to the movement of interest rates in the West.
The yuan's strength also helps explain why China has not to date joined India, South Africa, and Brazil in a coordinated central bank response to halt the plunge in developing market currencies (it echoes the neoliberal mantra in counselling "structural reform" of these economies instead) as well as the Chinese leadership's plan to establish a financial free trade zone in Shanghai as a further move towards "liberalizing" its financial account, potentially as important a development as the pilot project which opened the country's first special economic zone in Shenzhen to foreign manufacturers in 1979.
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Milestone for Yuan Marks Rise of China
Yuan Rises to Ninth-Most-Actively-Traded Currency Globally
By NICOLE HONG, CLARE CONNAGHAN and TOM ORLIK
Wall Street Journal
September 5 2013
China for the first time joined the ranks of the most-traded international currencies, underscoring the rise of the world's second-largest economy and the growth of the global foreign-exchange market.
The Chinese yuan vaulted to ninth in the Bank for International Settlements' latest report on foreign-exchange turnover, surpassing the Swedish krona and New Zealand dollar, among other widely used currencies.
Trading in the Chinese currency, also known as the renminbi, has more than tripled over the past three years, to $120 billion a day in 2013, the BIS said, referencing survey data from April. Daily U.S. dollar trading in 2013 has averaged $4.65 trillion.
Yuan gains highlight China's ambitions to play a larger role in a market long dominated by the dollar and, to a lesser extent, the euro. Daily global currency flows have risen more than 30% in three years. The yuan ranked 17th in the previous BIS survey, in 2010. The shift also highlights the international nature of the manufacturing supply chain and the flexibility U.S.-based firms can gain by using yuan.
The report also showed the continued dominance of London as a foreign-exchange hub: 41% of daily average currency trading took place in the U.K., up from 32.6% in 1998. The U.S. share of the currency market grew slightly over the same period, rising to 18.9% in 2013 from 18.3% 15 years earlier.
Like the rising yuan, the Mexican peso ranked among the top-10 most-traded currencies. It cracked the list for the first time since 1998, demonstrating the breadth of the ascent of emerging-market currencies. Both the yuan and peso roughly doubled their shares of the market. The Russian ruble, Turkish lira, South African rand and Brazilian real all also accounted for a bigger slice of global flows, while the Korean won and Polish zloty accounted for slightly smaller shares.
In developed-market currencies, flows in the Japanese yen also shot higher in this year's survey, with turnover surging by 63% from 2010. Trading in the dollar against the yen was up by about 70%, the BIS said.
China's central bank on Thursday raised the prospect of a further loosening of controls on cross-border investment, broadening access to the economy and banking sector. Officials have signaled they don't believe efforts to ease restrictions should be slowed by market volatility or other external factors, such as the U.S. Federal Reserve's plans to reduce monetary stimulus. Observers said the shift could hasten more-widespread use of the yuan.
"As China starts loosening up its banking regulations, companies will eventually see the renminbi on par with the euro," said Anil Sawrup, a senior vice president at currency-exchange firm Cambridge Mercantile Group. "Now that it's in the top 10, more businesses will realize the urgency of making payments in the Chinese currency."
Yuan payments by American companies were up almost 90% in the first half of 2013 from the same period a year ago, according to a survey from global payment-services firm Western Union Business Solutions. The survey showed yuan transactions now represent 12% of all U.S. payments to China, up from 8.5% in the first half of last year.
The Chinese government began liberalizing the currency in 2009, but controls still made it difficult for businesses to make payments directly in the yuan. In early 2012, the central bank announced that all Chinese companies could settle their trades in yuan and more directly swap foreign currencies with it.
"Five years ago, it was next to impossible to help our clients pay Chinese suppliers in renminbi because of the government controls," said Guido Schulz, global head of strategic management at AFEX, an international payment service. "Now, it's just another transaction."
Anbo International Ltd., a U.K.-based wood-flooring manufacturer and distributor, has been paying its Chinese suppliers in renminbi for more than two years as a way to cut costs. Since Chinese factories usually raise prices on foreign currency transactions as a cushion for potential exchange-rate fluctuations, paying in the local currency allowed Anbo to get a 3% to 4% discount on the kitchen tops and hardwood flooring it imports from China, said Guren Zhou, managing director at the company.
He estimates Anbo has saved about $1 million since it switched to yuan payments, which also allowed the company to sell their products to home-improvement retailers in the U.K. at a cheaper price than competitors could.
"If you're an importing business, paying renminbi to China will give you flexibility on pricing and allow you to compete with other people who aren't dealing in renminbi," Mr. Zhou said. "It's a really good thing to do."
This rapid growth of foreign exchange and the rise of the yuan underscore why banks and financial centers around the world are keen to grab a slice of offshore yuan trading.
Since China made Hong Kong its first offshore trading center for its currency in 2009, competition has been fierce among global and regional financial hubs to be key yuan markets as Beijing tries to make the currency a serious rival to the dollar's supremacy in global trade. Singapore and London have emerged as the leading candidates, with Tokyo, Sydney, Luxembourg and Kuala Lumpur also vying for a spot.
"The renminbi has been a big growth story over the last year," said Richard Anthony, global head of foreign-exchange electronic trading at HSBC in London. "Trading volumes are increasing not only from corporate clients off the back of global trade, but also from the investor community."
With a stable economy, healthy banking system, and exchange rate "approaching balance," the timing is right for China to push capital-account opening, wrote Sheng Songcheng, head of the central bank's statistics department in an article in the central bank's own Financial News on Thursday. The capital account reflects investment flows, while the current account measures trade flows.
A shift by the Fed to reduce its $85 billion monthly bond-purchase plan, which could trigger fresh swings in global capital flows, shouldn't be allowed to affect China's plans, Mr. Sheng added.
As part of the steps toward a convertible yuan, domestic media have reported that a new free-trade zone to be set up in Shanghai could feature more liberal rules on cross-border yuan flows.
Allowing freer international investment would be a significant change for a nation that has long imposed restrictions on such flows. A tightly controlled exchange rate has also been a key feature of China's reform-era development. The controls have been seen as a way to keep exports competitive and shield the country from waves of currency speculation.
Economists say loosening controls would help stem a slowdown in China's growth by encouraging more efficient use of capital and speeding a transition away from dependence on exports and toward stronger domestic demand.
But the move also brings risk, as a swing to hefty capital outflows could undermine the stability of an overstretched financial sector.
A sharp rise in lending over the past five years has left banks overextended, with the ratio of corporate and household debt to gross domestic product rising to about 170% at the end of 2012, from 117% in 2008.
"In a country where there's significant fragility in the financial system, rapid opening of the capital account could trigger a crisis," wrote Zhang Ming, a senior economist at the government's Chinese Academy of Social Sciences in a recent paper.
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